---

FORM 10-K

---

(MARK ONE)

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

OR

[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ___________ TO  _____________

Commission file number 0-26944

Silicon Storage Technology, Inc.(Exact name of Registrant as Specified in its Charter)



|California                                                     | 77-0225590                             
|-------------------------------------------------------------- | ---------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number)

1171 Sonora CourtSunnyvale, California     94086(Address of Principal Executive Offices including Zip Code)

(408) 735-9110(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, no par value.

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
[X]       No  [     ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K.        No  [     ]

1

---

Aggregate market value of the voting stock held by non-affiliates of
SST as of February 28, 2002: $700,443,000 based on the closing price of SST's
Common Stock as reported on the Nasdaq National Market. Number of shares
outstanding of SST's Common Stock, no par value, as of the latest practicable
date, February 28, 2002: 92,149,794.

Documents incorporated by reference: Exhibits previously filed as noted
on page 40. Part III - A portion of the Registrant's definitive proxy statement
for the Registrant's Annual Meeting of Shareholders, which will be filed with
the Securities and Exchange Commission.







2

---



Silicon Storage Technology, Inc.

                                    Form 10-K

                      For the Year Ended December 31, 2001

                                TABLE OF CONTENTS



|Part I.                                    |                                                                                       | Page
|------------------------------------------ | ------------------------------------------------------------------------------------- | ----
|Item 1.                                    | Business                                                                              | 4   
|Item 2.                                    | Properties                                                                            | 12  
|Item 3.                                    | Legal Proceedings                                                                     | 12  
|Item 4.                                    | Submission of Matters to a Vote of Security Holders                                   | 13  
|Part II.                                   |                                                                                       |     
|Item 5.                                    | Market for the Registrant's Common Equity and Related Shareholder Matters             | 14  
|Item 6.                                    | Selected Consolidated Financial Data                                                  | 15  
|Item 7.                                    | Management's Discussion and Analysis of Financial Condition and Results of Operations | 16  
|Item 7A.                                   | Quantitative and Qualitative Disclosures About Market Risks                           | 37  
|Item 8.                                    | Consolidated Financial Statements and Supplementary Data                              | 38  
|Item 9.                                    | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  | 38  
|Part III.                                  |                                                                                       |     
|Item 10.                                   | Directors and Executive Officers of the Registrant                                    | 39  
|Item 11.                                   | Executive Compensation                                                                | 39  
|Item 12.                                   | Security Ownership of Certain Beneficial Owners and Management                        | 39  
|Item 13.                                   | Certain Relationships and Related Transactions                                        | 39  
|Part IV.                                   |                                                                                       |     
|Item 14.                                   | Exhibits, Financial Statement Schedule and Reports on Form 8-K                        | 40  
|Index to Exhibits                          | 40                                                                                   
|Signatures                                 | 43                                                                                   
|Index to Consolidated Financial Statements | 44                                                                                   

3

---

PART I



Item 1. Business

Overview

We are a leading supplier of flash memory
semiconductor devices for the digital consumer, networking, wireless
communications and Internet computing markets.

We offer over 80 products based on our SuperFlash design and
manufacturing process technology. Our customers include: 3Com, Acer, Apple,
Asustek, Cisco, Compaq, Dell, First International Computer, or FIC, Gigabyte,
Huawei, Hyundai, Infineon, Intel, IBM, Inventec, Legend, LG Electronics, or LG,
Lucent, Motorola, National Semiconductor, NEC, Nintendo, Nortel, Panasonic,
Quanta, Samsung, Sanyo, Siemens, Sony and VTech.

We also license our SuperFlash technology to leading
semiconductor companies including Analog Devices, Advanced Technology Materials,
Inc., or ATMI, IBM, Motorola, Nanya Technology Corporation, or Nanya, National
Semiconductor, NEC, Oki, Samsung, Sanyo, Seiko-Epson, Taiwan Semiconductor
Manufacturing Co., Ltd., or TSMC and Winbond to embed in semiconductor devices
that integrate flash memory with other functions on a single chip.

Our products are manufactured at leading wafer foundries and
semiconductor manufacturers including Samsung, Sanyo, Seiko-Epson, TSMC, and
United Microelectronics Corporation, or UMC. We also work with Nanya, National
Semiconductor, Oki, Samsung, Sanyo, Seiko-Epson, TSMC and Vanguard to develop
new technology for manufacturing our products.

The semiconductor industry has historically been cyclical,
characterized by wide fluctuations in product supply and demand. From time to
time, the industry has also experienced significant downturns, often in
connection with, or in anticipation of, maturing product cycles and declines in
general economic conditions. Downturns of this type occurred in 1996, 1997 and
1998, and more recently in late 2000 and 2001. These downturns have been
characterized by weakening product demand, production over-capacity and
accelerated decline of selling prices, and in some cases have lasted for more
than a year. We began to experience a sharp downturn in several of our markets
late in the fourth quarter of 2000, as our customers reacted to weakening demand
for their products. During the first half of 2001, market conditions did not
improve as our customers continued to cancel backlog and/or push out shipments.
In the second half of 2001, we began to see a positive change in order
activities for our products for DVD players, CD-RW drives, Personal Digital
Assistants, or PDAs, and video games, as well as the continued strong shipments
since the second quarter in our products for desktop Personal Computers, or PCs,
and graphics cards. Sales of our products for the networking and wireless
communications market segments continued to be very weak.  Our business could be
harmed by industry-wide fluctuations in the future.

We derived 80.7% of our product revenues during 2001 and
77.6% of our product revenues during 2000 from product shipments to Asia.
Additionally, substantially all of our wafer suppliers and packaging and testing
subcontractors are located in Asia.

Industry Background

Semiconductor integrated circuits are critical
components used in an increasingly wide variety of applications, such as
computers and computer systems, communications equipment, consumer products and
industrial automation and control systems. As integrated circuit performance has
increased and size and cost have decreased, the use of semiconductors in these
applications has grown significantly. According to a December 2001 Dataquest
report, worldwide semiconductor device revenue declined from $226 billion in
2000 to $148 billion in 2001 and is expected to grow to $257 billion in 2005.

4

---

Historically, the demand for semiconductors has been driven
by the PC market. The demand for PCs has grown in recent
years, in part due to increased use of PCs for Internet access. According to a
Nikkei Market Access report, the PC market declined from 123 million units
shipped in 2000 to 119 million units shipped in 2001, and is expected to grow to
128 million units shipped in 2002. In recent years, growth in demand for
semiconductors relating to PCs has been outpaced by growth in demand for
semiconductors in digital electronic devices for communication and consumer
applications. Communications applications include digital subscriber line
modems, cable modems, wireless local area network devices, cellular phones and
pagers. Consumer-oriented digital electronic devices include digital cameras,
DVD players, MP3 players, PDAs, set-top boxes, CD-ROM drives and Global
Positioning System, or GPS, navigation systems.

In order to function correctly, PCs and other digital
electronic devices require program code. The program code defines how devices
function and affects how they are configured. In PCs, this program code, called
BIOS, initiates the loading of the PC's operating system, which is then read
from the disk drive. In the case of other digital electronic devices, the
program code is stored in its entirety in nonvolatile memory, mostly in flash
memory. As a result, virtually all complex electronic systems that use a
processor or controller for computing, consumer, communications, and industrial
applications require nonvolatile memory.

System manufacturers generally prefer nonvolatile memory
devices that can be reprogrammed efficiently in the system in order to achieve
several important advantages. With re-programmable memory, manufacturers can
cost effectively change program codes in response to faster product cycles and
changing market specifications. This in turn greatly simplifies inventory
management and manufacturing processes.  Re-programmable memory also allows the
manufacturer to reconfigure or update a system either locally or through a
network connection. In addition, in-system re-programmable devices can be used
for data storage functions, such as storage of phone numbers for speed dialing
in a cellular phone.

Flash memory is the predominant re-programmable nonvolatile
memory device used to store program code. Flash memory can electrically erase
select blocks of data on the device much faster and more simply than with
alternative solutions, such as Erasable Programmable Read-Only Memory, or EPROM.
Moreover, flash memory is significantly less expensive than other
re-programmable solutions, such as Electrically Erasable Programmable Read-Only
Memory, or EEPROMs. As a result, the demand for flash memory has grown
dramatically. This growth has been fueled by the need for code sharing and other
storage functions in a wide array of digital devices. According to a December
2001 Dataquest report, worldwide flash memory revenue was $8 billion in 2000 and
is expected to grow to $13 billion by 2005.

Our Solution

We are a leading supplier of flash memory
semiconductor devices addressing the needs of high volume electronic
applications. We believe our proprietary flash memory technology, SuperFlash,
offers superior performance to other flash memory solutions. In addition, we
believe SuperFlash has benefits that include high reliability, fast, fixed erase
time, the ability to be scaled to a smaller size and a low-cost manufacturing
process. Many leading technology companies use our technology in their products
including 3Com, Acer, Apple, Asustek, Cisco, Compaq, Dell, FIC, Gigabyte,
Huawei, Hyundai, Infineon, Intel, IBM, Inventec, Legend, LG, Lucent, Motorola,
National Semiconductor, NEC, Nintendo, Nortel, Panasonic, Quanta, Samsung,
Sanyo, Siemens, Sony and VTech. We offer over 80 products based on our
proprietary SuperFlash design and manufacturing process technology. These
products are produced to meet the needs of a wide range of digital consumer,
networking, wireless communications and Internet computing markets. Our product
offerings include standard flash products, application specific memory products,
embedded controllers and mass data storage products. Our memory devices have
densities ranging from 256 Kbit to 16 Mbit and are generally used for the
storage of program code. Our flash embedded microcontrollers support concurrent
flash read-while-write operations using In-Application Programming, or IAP. Our
mass data storage products are used for storing images, music and other data in
devices such as digital cameras and MP3 players.

Our products are manufactured at leading wafer foundries and
semiconductor manufacturers including Samsung, Sanyo, Seiko-Epson, TSMC and UMC.
We also work with Nanya, National Semiconductor, Oki, Samsung, Sanyo,
Seiko-Epson, TSMC and Vanguard to develop new technology for manufacturing our
products.

We license our SuperFlash technology to leading semiconductor
companies including Analog Devices, ATMI, IBM, Motorola, Nanya, National
Semiconductor, NEC, Oki, Samsung, Sanyo, Seiko-Epson, TSMC and Winbond to embed
in semiconductor devices that integrate flash memory with other functions on a
single device.

5

---

Our Strategy

Our objective is to be the leading worldwide supplier
of flash memory devices and intellectual property for program code storage
applications. In addition, we intend to leverage our SuperFlash technology to
penetrate the high-density mass data storage markets. We intend to achieve our
objectives by:

Maintaining a leading position in the program code storage
market. We believe that program code storage is an attractive segment of the
flash memory market for a number of reasons. While experiencing continued growth
in all densities, solutions for program code storage applications benefit from
the increasing number and variety of digital electronic applications, longer
product lives and lower density requirements relative to mass data storage
applications. We believe that our proprietary SuperFlash technology is a
superior product for program code storage applications because we believe it
offers superior reliability and performance at a lower cost of manufacture than
competing solutions.

Continuing to enhance our leading flash memory
technology. We believe that our proprietary SuperFlash technology is less
complicated, more reliable, more scalable and more cost-effective than competing
flash memory technologies. Our ongoing research and development efforts are
focused on enhancing our leading flash memory technology. We are working with
Nanya, National Semiconductor, Oki, Samsung, Sanyo, Seiko-Epson, TSMC and
Vanguard to develop new process technologies for SuperFlash.

Introducing new products based on SuperFlash. We
intend to introduce new and various application specific products. We recently
developed and continue to expand our ComboMemory family.  ComboMemory is a new
class of devices for wireless and portable applications that combine volatile
and nonvolatile memory on a single monolithic device or multiple dies in a
common package with optimized performance. We also recently developed and
continue to expand our new, re-programmable microcontroller family and new mass
data storage products. In 2001, we introduced a new family of serial flash
products, 8 Mbit firmware hubs and 16 Mbit concurrent flash. ComboMemory and
concurrent flash are designed to address the memory needs of wireless
communications devices, such as cellular phones, wireless modems and pagers.

Maintaining a leading position in licensing embedded flash
technology. We believe that SuperFlash technology is well-suited for
embedded memory applications, which integrate flash memory and other functions
onto a monolithic chip. We intend to continue to license SuperFlash technology
to semiconductor manufacturers for use in embedded flash applications, to
enhance our technology and to facilitate integration at higher densities and
higher levels of complexity.

Penetrating the high-density mass data storage market.
Many digital electronic devices currently being introduced, such as MP3 players,
digital cameras and PDAs, require high-density flash memory for storing music,
pictures and other data that require mass data storage capacities. We believe
that the market for high-density flash memory is attractive based on its
potential size and growth. We further believe that SuperFlash technology can
readily scale to address this market's needs as they change. We intend to
leverage our leading technology and strong manufacturing partnerships to
introduce high-density mass data storage flash products and to compete
effectively in this market.

Leveraging our leading SuperFlash technology to become a premier provider
of wireless memory solutions.

Our Flash Products

Currently, we offer low and medium density devices
(256 Kbit to 16 Mbit) that target a broad range of existing and emerging
applications in the digital consumer, networking, wireless communications and
Internet computing markets. Our products are segmented largely based upon
attributes such as density, voltage, access speed, package and target
application.  We divide our products into three distinct reportable segments:
the Standard Memory Product Group, or SMPG, the Application Specific Product
Group, or ASPG, and the Special Product Group, or SPG.

6

---

SMPG.  SMPG includes our three standard flash memory
product families: the Small-Sector Flash, or SSF, family, the Multi-Purpose
Flash, or MPF, family, and the Many-Time Programmable, or MTP, family. These
families allow us to produce products optimized for cost and functionality to
support the broad range of applications that use nonvolatile memory products.

Among the three product families, SSF provides the highest
functionality. MPF is a lower cost, mainstream flash solution that eliminates
much of the peripheral circuitry of SSF products while retaining many of the
benefits of the SuperFlash core: high reliability, faster erase performance,
geometric scalability and our low-cost manufacturing process. Both SSF and MPF
address mainstream flash applications that require In System Programming, or
ISP. MTP devices are our lowest cost flash products. Our MTP products provide an
electrically erasable alternative to EPROM and other low-end flash products that
do not require ISP.

ASPG. ASPG includes Application Specific Memory
Products, Flash Embedded Controller Products and Mass Data Storage Products. Our
Application Specific Memory Products includeFlashBank, Concurrent SuperFlash, Serial Flash, Firmware
Hub, or FWH, and Low Pin Count, or LPC flash memory products. These products are
designed to address specific applications such as cellular phones, pagers, PDAs,
set-top boxes, hard disk drives and PC BIOS applications.

Our Flash Embedded Controller Products include the
FlashFlex51 microcontroller product family, the ATA flash media controllers and
a proprietary controller for programmable remote controls.  The FlashFlex51
microcontroller family features products that are both software and pin
compatible with industry standard, 8051 microcontroller products. This family is
designed with two banks of program memory to support concurrent read and write
operations using In Application Programming, or IAP. It also contains SoftLock
security features allowing IAP while preventing software piracy. These products
target the 8-bit microcontroller market segment with products addressing the
emerging applications for in-system re-programmable microcontrollers, such as
home automation devices, internet-ready consumer electronics and appliances,
educational toys and industrial control applications.

Our Mass Data Storage Products, including the ATA-disk Chips,
or ADC, ATA-disk Module, or ADM, and CompactFlash Card product families address
digital cameras, Internet appliances, PDAs, MP3 players, set-top boxes, and
other types of mass data storage applications. Our Mass Data Storage Products
leverage our patented ATA controller technology and flash memory design
expertise to offer favorable read/write data transfer rates to the flash memory,
which allows significant speed advantages for applications such as digital
cameras.

SPG.  SPG includes ComboMemory and ROM/RAM Combos.  The ComboMemory
devices are made up of Flash Memory and SRAM packaged in a Multi-Chip Package,
or MCP, and are ideal for applications such as cellular phones, GPS devices and
other electronic devices requiring low power and a small form factor. The
ROM/RAM Combos are used primarily in pagers and digital organizer
applications.

Technology Licensing

We license our SuperFlash technology to semiconductor
manufacturers for use in embedded flash applications. We intend to increase our
market share by entering into additional license agreements for our SuperFlash
process and memory cell technology with leading wafer foundries and
semiconductor manufacturers. We expect to continue to receive licensing fees and
royalties from these agreements. We design our products using our patented
memory cell technology and fabricate them using our patented process technology.
As of December 31, 2001, we held 43 patents in the United States relating to
certain aspects of our products and processes, and have filed for several more.
In addition, we hold several patents in Europe, Japan, Korea, Taiwan and Canada
and have filed several foreign patent applications in Europe, Japan, Korea,
Taiwan and Canada.

Customers

We provide high-performance flash memory solutions to
customers in four major markets: digital consumer, networking, wireless
communications and Internet computing. Our customers benefit by obtaining
products that we believe are highly reliable, technologically advanced and have
attractive cost structures. As a result of these highly desirable benefits, we
have developed relationships with many of the industry's leading companies. In
digital consumer products, we provide memory components for consumer companies
including Acer, Bang & Olufsen, Canon, Hitachi, Infineon, LG, Nintendo,
Panasonic, Samsung, Sanyo, Sony, TiVo and Yamaha. In networking, we provide
memory components for 3Com, Cisco, E-tech, Intel and Nortel. In wireless
communications, we provide products for companies including Cambridge Silicon
Radio, or CSR, Kirk Telecomm, LG, Maxon, RTX, Siemens and VTech. In Internet
computing, we provide wide array of memory components for companies including
Acer, Apple, Asustek, Compaq, Dell, FIC, Gigabyte, HP, IBM, Mitac, NEC and
Quanta.

7

---

The following tables illustrate the geographic regions in
which our customers or licensees operate based on the country to which the
product is shipped or license revenue is generated.

`Year ended December 31,
                                     -------------------------------
                                       1999       2000       2001
                                     ---------  ---------  ---------
United States...................... $  13,644  $  76,898  $  28,592
Europe.............................     7,347     28,376     21,332
Japan..............................    16,396     66,635     23,549
Korea..............................    11,750     42,986     22,039
Taiwan.............................    33,541    133,677    110,847
China (including Hong Kong)........    28,776     90,839     57,146
Other Asian countries..............     9,340     48,102     28,157
Rest of world......................     4,000      2,748      2,368
                                     ---------  ---------  ---------
                                    $ 124,794  $ 490,261  $ 294,030
                                     =========  =========  =========`

Sales and Distribution

We sell a majority of our products to customers in
Asia through manufacturers' representatives. We also sell and distribute our
products in North America and Europe through manufacturers' representatives and
distributors. Our manufacturer representative and distributor relationships are
generally cancelable by us or the other parties with reasonable notice.

Applications

As the Digital Consumer, Networking, Wireless
Communications and Internet Computing industries continue to expand and
diversify, new applications are likely to be developed. We believe our products
are designed to address this expanding set of applications:

`Wireless         Internet
         Digital Consumer             Networking      Communications      Computing
---------------------------------- ----------------- ----------------- ---------------
TV Replayer        Set-top Box     VoIP              Cellular Phone    Network PC
Digital TV         CD-ROM Drive    DSL Modem         Data Pager        Notebook PC
Digital Camera     CD-RW Drive     Cable Modem       Cordless          Palm PC
Digital Camcorder  DVD-ROM Drive   V.90/56K Modem     Telephone        X-PC
DVD Player         DVD-RAM Drive   Wireless LAN      GPS on Cellular   Server
VCD Player         DVD-RW Drive    Network            Phone            PC Firmware Hub
MP3 Player         Web Browser      Interface Card   Bluetooth         Graphics Card
Video Game         Hand-held GPS   Router/Switch      Applications     Printer
PDA                Electronic Toys                                     Copier/Scanner
Electronic Book    Smart Cards                                         Bar Code Scanner
                   Memory Cards`

8

---



Manufacturing

We purchase wafers and sorted die from semiconductor
manufacturing foundries, have this product shipped directly to subcontractors
for packaging, testing, and finishing, and then ship the final product to our
customers. Virtually all of our subcontractors are located in Asia.

Wafer and Sorted Die. We have manufacturing
arrangements with Nanya, National Semiconductor, Samsung, Sanyo, Seiko-Epson,
TSMC, UMC and Vanguard. During 2001, our major wafer fabrication foundries were
TSMC, Sanyo, Samsung and Seiko-Epson. In 2001, wafer sort, which is the process
of taking silicon wafers and separating them into individual die, was performed
at Acer Testing, Inc., King Yuan Electronics Company, Limited, or KYE, Lingsen,
Samsung, Sanyo, Seiko-Epson and TSMC. Although capacity is not guaranteed, under
these arrangements, we generally receive preferential treatment regarding wafer
pricing and capacity. In order to obtain, on an ongoing basis, an adequate
supply of wafers, we have considered and will continue to consider various
possible options, including equity investments in foundries in exchange for
guaranteed production volumes, the formation of joint ventures to own and
operate foundries and the licensing of our proprietary technology. On March 6,
2001, we invested $50.0 million in Grace Semiconductor Manufacturing
Corporation, or GSMC. GMSC is a foreign-funded wafer foundry project, which is
located in Shanghai, People's Republic of China.

Packaging, Testing and Finishing. In the assembly
process, the individual die are assembled into packages. Following assembly, the
packaged devices require testing and finishing to segregate conforming from
nonconforming devices and to identify devices by performance levels. Currently,
all devices are tested and inspected pursuant to our quality assurance program
at our domestic or international subcontracted test facilities or at our test
facilities in Sunnyvale, California. Finishing operations are performed at our
Sunnyvale facility or at other domestic or international subcontracted
facilities before shipment to customers. Certain facilities currently perform
consolidated assembly, packaging, test and finishing operations at one location.
During 2001, most subcontracted facilities performing the substantial majority
of our operations were in Taiwan. The subcontractors with the largest amount of
our activity are KYE, Lingsen, and Powertech Technology, Incorporated, or PTI.
We hold equity investments in three subcontractors: Apacer Technology, Inc., or
Apacer, KYE and PTI. For newly released products, the initial test and finishing
activities are performed at our Sunnyvale facility.

Research and Development

We believe that our future success will depend in
part on the development of next generation technologies with reduced feature
size. During 1999, 2000 and 2001, we spent $18.2 million, $41.5 million and
$50.4 million, respectively, on research and development. Our research efforts
are focused on process development and product development. Our research
strategy is to collaborate with our partners to advance our technologies. We
work simultaneously with several partners on the development of multiple
generations of technologies. In addition, we allocate our resources and
personnel into category-specific teams to focus on new product development. From
time to time we invest in, jointly develop with, license or acquire technology
from other companies in the course of developing products. For example, in June
1999, we acquired Linvex Technology Corp., a privately held, memory design
company located in Sunnyvale, California.

Competition

The semiconductor industry is intensely competitive
and has been characterized by price erosion, rapid technological change and
product obsolescence. We compete with major domestic and international
semiconductor companies, many of whom have substantially greater financial,
technical, marketing, distribution, manufacturing and other resources than us.
Our low to medium density memory products, sales of which presently account for
substantially all of our revenues, compete against products offered by Advanced
Micro Devices, or AMD, Atmel, Intel, Macronix, STMicroelectronics and Winbond.
Our high-density memory products compete with products offered by AMD, Atmel,
Fujitsu, Intel, Mitsubishi, Samsung, Sharp Electronics and Toshiba. In addition,
competition may come from alternative technologies such as ferroelectric random
access memory device, or FRAM, technology.

9

---

The competition in the existing markets for some of our newer
product families such as the FlashFlex51 microcontroller product family and the
ADC, ADM, and CompactFlash Card product families is extremely intense. We
compete principally with major companies such as Atmel, Intel, Microchip
Technology, Motorola and Philips in the microcontroller market and with Hitachi,
M-Systems and SanDisk in the memory card and memory module market. We may, in
the future, also experience direct competition from our foundry partners. We
have licensed to each foundry the right to fabricate certain products based on
our proprietary technology and circuit design, and to sell such products
worldwide, subject to royalty payments back to us.

We compete principally on price, reliability, functionality
and the ability to offer timely delivery to customers. While we believe that our
low and medium density products currently compete favorably on the basis of
cost, reliability and functionality, it is important to note that our principal
competitors have a significant advantage over us in terms of greater financial,
technical and marketing resources. Our long-term ability to compete successfully
in the evolving flash memory market will depend on factors both within and
beyond our control, including access to advanced process technologies at
competitive prices, successful and timely product development, wafer supply,
product pricing, actions of our competitors and general economic conditions.

Employees

As of December 31, 2001, we employed 487 individuals
on a full-time basis, all but thirty-three of whom reside in the United States.
Eighteen employees reside in Taiwan, four employees reside in Japan, four
employees reside in the United Kingdom, five employees reside in China, and one
employee resides in each of Sweden and Korea. Of these 487 employees, 90 were
employed in manufacturing support, 263 in engineering, 74 in sales and marketing
and 60 in administration and finance. None of our employees are represented by a
collective bargaining agreement, nor have we ever experienced any work stoppage
related to strike activity. We believe that our relationship with our employees
is good.

Executive Officers and Directors

The following table lists the names, ages and
positions of our executive officers and directors as of December 31, 2001. There
are no family relationships between any director or executive officer of SST.
Executive officers serve at the discretion of the board of directors.

|Name                                                                                                                                                                    | Age                           | Position                                                                                                                                                                                                                                                                                                                                                                                                                          
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Bing Yeh (1)(4)
Yaw Wen Hu
Derek Best
Michael Briner
Isao Nojima
Paul Lui
Jeffrey L. Garon
Tsuyoshi Taira (1)(2)(3)
Yasushi Chikagami (1)(2)(3)
Ronald Chwang (1)(2)(3) | 51
52
51
54
57
51
41
63
63
53 | President and Chief Executive Officer and Director
Senior Vice President, Operations and Process
Development and Director
Senior Vice President, Sales and Marketing
Senior Vice President, Application Specific Product Group
Vice President, Standard Memory Product Group
Vice President, Special Product Group
Vice President, Finance and Administration and
Chief Financial Officer and Secretary
Director
Director
Director

__________

(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Member of Stock Option Committee
(4) Sole Member of Non-Officer Stock Option Committee

Bing Yeh, one of our co-founders, has served as our
President and Chief Executive Officer and has been a member of our board of
directors since our inception in 1989. Prior to that, Mr. Yeh served as a senior
research and development manager of Xicor, Inc., a nonvolatile memory
semiconductor company. From 1981 to 1984, Mr. Yeh held program manager and other
positions at Honeywell Inc. From 1979 to 1981, Mr. Yeh was a senior development
engineer of EEPROM technology of Intel Corporation. He was a Ph.D. candidate in
Applied Physics and earned an Engineer degree at Stanford University. Mr. Yeh
holds an M.S. and a B.S. in Physics from National Taiwan University. Mr. Yeh is
also the Chairman of the Monte Jade Science & Technology Association for
2001.

10

---

Yaw Wen Hu, Ph.D., joined us in 1993 as Vice
President, Technology Development. In 1997, he was given the additional
responsibility of wafer manufacturing and, in August 1999, he became Vice
President, Operations and Process Development. In January 2000, he was promoted
to Senior Vice President, Operations and Process Development. Dr. Hu has been a
member of our board of directors since September 1995. From 1990 to 1993, Dr. Hu
served as deputy general manager of technology development of Vitelic Taiwan
Corporation. From 1988 to 1990, he served as FAB engineering manager of
Integrated Device Technology, Inc. From 1985 to 1988, he was the director of
technology development at Vitelec Corporation. From 1978 to 1985, he worked as a
senior development engineer in Intel Corporation's Technology Development Group.
Dr. Hu holds a B.S. in Physics from National Taiwan University and an M.S. in
Computer Engineering and a Ph.D. in Applied Physics from Stanford University.

Derek Best joined us in June 1997 as Vice President of
Sales and Marketing. In June 2000 he was promoted to Senior Vice President,
Sales & Marketing. Prior to joining SST he worked for Micromodule Systems, a
manufacturer of high-density interconnect technology, as Vice President
Marketing and Sales World Wide from 1992 to 1996. From 1987 to 1992 he owned his
own company, Mosaic Semiconductor, a semiconductor company. Mr. Best holds an
Electrical Engineering degree from Portsmouth University in England.

Michael Briner joined us as Vice President, Design
Engineering in November 1997, and become Vice President, Products during 1999.
In February 2001, he was promoted to Senior Vice President, Application Specific
Product Group. From 1993 to 1997, he served as Vice President of Design
Engineering for Micron Quantum Devices, Inc., a subsidiary of Micron Technology,
Inc., chartered to develop and manufacture flash memory products. From 1986
through 1992, he served as Director of Design Engineering for the Nonvolatile
Division of Advanced Micro Devices, Inc. In this position, he was instrumental
in helping AMD become a major nonvolatile memory manufacturer. Mr. Briner holds
a B.S. in Electrical Engineering from the University of Cincinnati.

Isao Nojima served as our Vice President, Advanced
Development since July 1997 until he was named Vice President, Standard Memory
Product Group in 2000. From March 1993 to June 1997 he served as Vice President,
Memory Design and Product Engineering. From 1990 to 1993, Mr. Nojima served as
Director of Design Engineering of Pioneer Semiconductor Corporation, now called
Pericom, a manufacturer of semiconductors. From 1980 to 1990, he served as
design manager of Xicor Inc., a nonvolatile semiconductor company. From 1977 to
1980, he served as a senior design engineer for Intel Corporation. From 1969 to
1976, he was a senior researcher at Toshiba's R&D Center in Japan. Mr.
Nojima holds a B.S. and an M.S. in Electrical Engineering from Osaka University
in Japan.

Paul Lui joined us as Vice President and General
Manager of the Linvex Product Line in June 1999 until he was named Vice
President, Special Product Group in June 2001. From 1994 to 1999, he was the
president and founder of Linvex Technology Corporation. From 1987 to 1994, he
was the president and chief executive officer of Macronix, Inc.  From 1981 to
1985, he served as group general manager at VLSI Technology, Inc. where he was
responsible for transferring that company's technology to Korea. In addition,
Mr. Lui has held senior engineering positions at the Synertek Division of
Honeywell and McDonnell Douglas. Mr. Lui holds an M.S.E.E. degree from
University of California, Berkeley and a B.S. degree in Electrical Engineering
and Mathematics from California Polytechnic State University, San Luis Obispo.

Jeffrey L. Garon joined us as Vice President, Finance
and Administration and Chief Financial Officer and Corporate Secretary in March
1998. Prior to that, Mr. Garon served as president and senior operating officer
of The Garon Financial Group, Inc., a venture capital and venture consulting
firm specializing in start-ups, turnarounds and restarts, from 1994 to 1998.
From 1993 to 1994, he served as a vice president and chief financial officer of
Monster Cable Products, Inc., a leading provider of audio cables and supplies to
consumers and the consumer electronic retail channel. Prior to this, Mr. Garon
held senior financial positions with Visual Edge Technology, Inc., a provider of
large format digital imaging systems, Oracle Corporation, Ashton-Tate
Corporation and Teledyne Microelectronics. Mr. Garon holds a B.S. in Business
Administration Finance from California State University, Northridge and a M.B.A.
from Loyola Marymount University.

11

---

Tsuyoshi Taira has been a member of our board of
directors since July 1993. Mr. Taira served as a member of the board of
directors of Atmel Corporation from 1987 to 1992. Mr. Taira served as president
of Sanyo Semiconductor Corporation from 1986 to 1993. Mr. Taira was chairman of
the Sanyo Semiconductor Corporation from 1993 to 1996. Mr. Taira left the Sanyo
Semiconductor Corporation in August, 1996. Mr. Taira currently owns and runs a
marketing and management consulting company, Tazan International, Inc. Mr. Taira
holds a B.S. from Tokyo Metropolitan University.

Yasushi Chikagami has been a member of our board of
directors since September 1995. Mr. Chikagami has been chairman of Arise, Inc
since 2000. Mr. Chikagami has also served as director of GVC Corporation and
Trident Microsystems, Inc. since 1993. Mr. Chikagami holds a B.S. in
Agricultural Engineering from Taiwan University and a M.S. in engineering from
University of Tokyo.

Ronald Chwang, Ph.D., is the Chairman and President of
Acer Technology Ventures, America. Dr. Chwang currently serves actively on the
board of a number of ATV's portfolio companies such as Reflectivity, Tesaria,
iRobot, OctaSoft, etc. He also serves on the board of Acer Laboratories Inc. and
Ambit Microsystems Corp. in Taiwan. From 1992 to 1997, Dr. Chwang was president
and chief executive officer of Acer America Corporation. Dr. Chwang has been
with Acer since 1986, serving in various executive positions leading business
units engaged in ASIC products, computer peripherals, and Acer-Altos server
system. Before joining Acer, Dr. Chwang worked for several years in development
and management positions at Intel in Oregon and Bell Northern Research in
Ottawa, Canada. Dr. Chwang holds a B.S. in Electrical Engineering from McGill
University and a Ph.D. in Electrical Engineering from the University of Southern
California.

Item 2. Properties

As of January 31, 2002, we have six leased facilities
totaling approximately 188,000 square feet in Sunnyvale, California in which our
executive offices, manufacturing engineering, research and development and
testing facilities are located. We are currently only occupying five of these
facilities totaling approximately 168,000 square feet. The leases on five
facilities expire in 2005 and the lease on one facility expires in 2010. We also
have one lease for approximately 2,000 square feet, which was obtained upon the
acquisition of Agate, and this lease will expire in March 2002. We believe these
facilities are adequate to meet our needs for at least the next 12 months.

Item 3. Legal Proceedings

On January 3, 1996, Atmel Corporation sued us in the U.S.
District Court for the Northern District of California. Atmel's complaint
alleged that we willfully infringe five U.S. patents owned by or exclusively
licensed to Atmel. Atmel later amended its complaint to allege infringement of a
sixth patent. Regarding each of these six patents, Atmel sought a judgment that
we infringe the patent, an injunction prohibiting future infringement, and
treble damages, as well as attorney's fees and expenses.

On two of the six patents, the District Court ruled by
summary judgment that we did not infringe. Two of the other patents were
invalidated by another U.S. District Court in a proceeding to which we were not
a party, but this decision was later reversed by the Federal Circuit Court of
Appeals.  At this point, three patents remain at issue in Atmel's District Court
case against us: the '811, the '829 and the '903.

On February 17, 1997, Atmel filed an action with the
International Trade Commission, or ITC, against two suppliers of our parts,
involving four of the six patents that Atmel alleged that we infringed in the
District Court case above. We intervened as a party to that investigation.
Pursuant to indemnification agreements with these suppliers, we were obligated
to indemnify both to the extent provided in those agreements. As more fully
described below, the settlement with Winbond terminated our indemnity
obligations to that company.

As to one of these four patents, Atmel's claims were
withdrawn because of the summary judgment granted by the District Court, as
described above. On October 16, 2000, the ITC found U.S. Patent No. 4,451,903
("the '903 patent") valid and infringed, and ruled that we could not import
into the United States certain products that use the claimed circuit made by one
of our suppliers. The ITC also ruled that we do not infringe the two other
patents at issue ("the '811 and '829 patents"). We appealed from the
Limited Exclusion Order, and in August 2001 the Court of Appeals for the Federal
Circuit issued an opinion giving its reasons for denying that appeal.  The '903
patent and the ITC's Limited Exclusion Order expired on September 14, 2001.

12

---

In the District Court case, in April 2001, Atmel filed
motions for summary judgment on the '811 and '829 patents as well as the '903
patent.  On May 11, 2001 we filed our opposition papers with the court and filed
motions for summary judgment that the '903 patent is invalid.  The trial court
denied Atmel's motion for summary judgment and our motion for summary judgment.
After the decision of the Federal Circuit was rendered, we renoticed our motion
for summary judgment that the '903 patent was invalid. We also filed two motions
for sanctions for alleged discovery abuse. The trial court granted one of our
sanctions motions and denied the other. Our motion for summary judgment to
invalidate the '903 patent has been submitted and no decision has been reached.
Atmel has filed a counter motion for summary judgment that the '903 patent is
valid. We anticipate that the court will issue a ruling on both motions before
trial. On January 14, 2002 the court in Atmel Corp. v. Macronix America,
Inc. (N.D. Cal. C97-02920 DLJ) denied Atmel's motion to correct another one
of the patents Atmel has asserted against us ("the '747 patent").  We intervened
as a party in the Macronix case for purposes of opposing that motion.  As a
result of that decision, Atmel has publicly stated that it will withdraw its
claims against us based on the '747 patent. The trial court has scheduled a
trial date on all issues to begin on April 8, 2002.

From time to time, we are also involved in other legal
actions arising in the ordinary course of business. While we have accrued
certain amounts for the estimated legal costs associated with defending these
matters, there can be no assurance the Atmel complaint or other third party
assertions will be resolved without costly litigation, in a manner that is not
adverse to our financial position, results of operations or cash flows or
without requiring royalty payments in the future which may adversely impact
gross margins. No estimate can be made of the possible loss or possible range of
loss associated with the resolution of these contingencies.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted during the fourth quarter to a
vote of security holders.

13

---



PART II



Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters

Price Range of Common Stock

The principal U.S. market for our Common Stock is The
Nasdaq Stock Market's National Market. The only class of our securities that is
traded is our Common Stock. Our Common Stock has traded on The Nasdaq Stock
Market's National Market since November 21, 1995, under the symbol SSTI. The
following table sets forth the quarterly high and low closing sales prices of
the Common Stock for the period indicated as reported by The Nasdaq Stock
Market. These prices do not include retail mark-ups, markdowns, or commissions.
The closing sales price of our Common Stock on December 31, 2001, the last
trading day in 2001, was $9.64.



|2000                                                          |                                                                                                              | High Close                                   | Low Close                               
|------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | -------------------------------------------- | ----------------------------------------
|First Quarter:
Second Quarter:
Third Quarter:
Fourth Quarter: | January 1 - March 31, 2000
April 1 - June 30, 2000
July 1 - September 30, 2000
October 1 - December 31, 2000 | $ 27.458
     36.083
     34.063
     27.375 | $ 9.854
 20.330
 18.604
 10.125         
|2001                                                          |                                                                                                              | High Close                                   | Low Close                               
|First Quarter:
Second Quarter:
Third Quarter:
Fourth Quarter: | January 1 - March 31, 2001
April 1 - June 30, 2001
July 1 - September 30, 2001
October 1 - December 31, 2001 | $ 19.000
     12.010
     10.090
     14.020 | $ 8.630
     5.900
     4.030
     4.350
|2002                                                          |                                                                                                              | High Close                                   | Low Close                               
|First Quarter:                                                | January 1 - March 15, 2002                                                                                   | $ 11.250                                     | $ 6.520                                 



Approximate Number of Equity Security Holders

As of December 31, 2001, there were approximately 260
record holders of our Common Stock.

Dividends

We have never paid a cash dividend on our Common
Stock and we intend to continue to retain earnings, if any, to finance future
growth. Accordingly, we do not anticipate the payment of cash dividends to
holders of Common Stock in the foreseeable future. In addition, our line of
credit does not permit the payment of dividends.

14

---



Item 6. Selected Consolidated Financial Data

The following selected consolidated financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and the notes thereto included elsewhere in this report.

`Year ended December 31,
                                               -----------------------------------------------------
                                                 1997       1998       1999       2000       2001
                                               ---------  ---------  ---------  ---------  ---------
                                                      (in thousands, except per share data)

Consolidated Statements of Operations Data:
Net revenues:
    Product revenues - unrelated parties..... $  57,696  $  51,611  $  99,769  $ 408,708  $ 168,593
    Product revenues - related parties.......    16,100     15,264     18,473     66,608     90,025
    License revenues.........................     1,526      2,536      6,552     14,945     35,412
                                               ---------  ---------  ---------  ---------  ---------
      Total net revenues.....................    75,322     69,411    124,794    490,261    294,030
Cost of revenues.............................    62,747     62,703     94,652    264,139    248,161
                                               ---------  ---------  ---------  ---------  ---------
Gross profit.................................    12,575      6,708     30,142    226,122     45,869
                                               ---------  ---------  ---------  ---------  ---------
Operating expenses:
    Research and development.................     8,744     14,527     18,199     41,535     50,380
    Sales and marketing......................     6,587      7,290     10,576     27,968     26,794
    General and administrative...............     9,479      4,592      3,800     14,966     17,855
    Other....................................        --         --      2,011      3,911      4,620
                                               ---------  ---------  ---------  ---------  ---------
      Total operating expenses...............    24,810     26,409     34,586     88,380     99,649
                                               ---------  ---------  ---------  ---------  ---------
Income (loss) from operations................   (12,235)   (19,701)    (4,444)   137,742    (53,780)
Interest and other income....................     2,146      1,573        730     10,510      7,350
Interest expense.............................        --        (31)      (214)      (691)      (338)
                                               ---------  ---------  ---------  ---------  ---------
Income (loss) before provision for
    (benefit from) income taxes..............   (10,089)   (18,159)    (3,928)   147,561    (46,768)
Provision for (benefit from) income taxes....    (3,165)      (571)        88     41,813    (17,772)
                                               ---------  ---------  ---------  ---------  ---------
Net income (loss)............................ $  (6,924) $ (17,588) $  (4,016) $ 105,748  $ (28,996)
                                               =========  =========  =========  =========  =========
Net income (loss) per share - basic.......... $   (0.10) $   (0.26) $   (0.06) $    1.23  $   (0.32)
                                               =========  =========  =========  =========  =========
Net income (loss) per share - diluted........ $   (0.10) $   (0.26) $   (0.06) $    1.13  $   (0.32)
                                               =========  =========  =========  =========  =========

Consolidated Balance Sheet Data:
Total assets................................. $  82,539  $  56,138  $  88,806  $ 512,590  $ 446,760
                                               =========  =========  =========  =========  =========
Long-term obligations........................ $      66  $     663  $     446  $     279  $   1,793
                                               =========  =========  =========  =========  =========
Shareholders' equity......................... $  55,889  $  38,030  $  41,015  $ 416,635  $ 391,411
                                               =========  =========  =========  =========  =========`

15

---



Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations

Except for the historical information contained herein,
the following discussion contains forward-looking statements that involve risks
and uncertainties. All forward-looking statements included in this document are
based on information available to us on the date hereof, and we assume no
obligation to update any such forward-looking statements. Our actual results
could differ materially from those discussed. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below under the heading "Business Risks", as well as those discussed elsewhere
in this report.

Overview

We are a leading supplier of flash memory
semiconductor devices for the digital consumer, networking, wireless
communication and Internet computing markets.

The semiconductor industry has historically been cyclical,
characterized by wide fluctuations in product supply and demand. From time to
time, the industry has also experienced significant downturns, often in
connection with, or in anticipation of, maturing product cycles and declines in
general economic conditions. Downturns of this type occurred in 1996, 1997 and
1998, and more recently in late 2000 and 2001. These downturns have been
characterized by weakening product demand, production over-capacity and
accelerated decline of selling prices, and in some cases have lasted for more
than a year. We began to experience a sharp downturn in several of our markets
late in the fourth quarter of 2000, as our customers reacted to weakening demand
for their products. During the first half of 2001, market conditions did not
improve as our customers continued to cancel backlog and/or push out shipments.
In the second half of 2001, we began to see a positive change in order
activities for our products for DVD players, CD-RW drives, PDAs and video games,
as well as the continued strong shipment from the second quarter in our products
for PCs and graphics cards. Sales of our products for the networking and
wireless communications market segments continued to be very weak. Our business
could be harmed by industry-wide fluctuations in the future.

Our product sales are made primarily using short-term
cancelable purchase orders. The quantities actually purchased by the customer,
as well as shipment schedules are frequently revised to reflect changes in the
customer's needs and in our supply of product. Accordingly, our backlog of open
purchase orders at any given time is not a meaningful indicator of future sales.
Changes in the amount of our backlog do not necessarily reflect a corresponding
change in the level of actual or potential sales.

We derived 80.8%, 77.6% and 80.7% of our product revenues
during 1999, 2000 and 2001, respectively, from product shipments to Asia.
Additionally, substantially all of our wafer suppliers and packaging and testing
subcontractors are located in Asia.

Our top ten end customers, which excludes transactions
through stocking representatives and distributors, accounted for 28.4%, 19.3%
and 31.5% of our net product revenues in 1999, 2000 and 2001, respectively.

No single end customer, which we define as original
equipment manufacturers, or OEMs, original design manufacturers, or ODMs, contract
electronic manufacturers, or CEMs, or end users, represented 10.0% or more of our
net product revenues during 1999, 2000 and 2001.

Since March 2001, we have been out-sourcing our customer
service logistics in Taiwan to Silicon Professional Technology Ltd., or SPT.
SPT is a wholly-owned subsidiary of one of our stocking representatives in
Taiwan, Professional Computer Technology Limited, or PCT.  SPT provides
planning, warehousing, delivery, billing, collection and other logistic
functions for us in Taiwan.  SPT now services substantially all of our end
customers based in Taiwan and selected end customers throughout Asia.  Products
shipped to SPT are accounted for as consigned inventory, and revenue is
recognized when the products have been delivered and are considered as a sale to
our end customers by SPT.  For the year ended December 31, 2001, SPT serviced
end customer sales accounting for 30.3% of our net product revenues recognized.
We are in the process of working with SPT to expand their service coverage to
include all of our end customers in China and Southeast Asia.

We ship products to, and have accounts receivable from, OEMs,
ODMs, CEMs, stocking representatives, domestic distributors, and our logistics
center.   Our stocking representatives, domestic distributors and logistics
center reship our products to our end customers, including OEMs, ODMs, CEMs and
end users. In 1999, Actron Technology Co., Ltd., or Actron, a stocking
representative, represented 12.4% of our net product revenues. No stocking
representative or domestic distributor serviced more than 10.0% of our end
customer sales in 2000 or 2001.

16

---

As of December 31, 2000, no end customer, domestic
distributor, logistics center or stocking representative exceeded 10.0% of our
accounts receivable.  As of December 31, 2001, SPT, our logistics center,
represented 48.8% of our accounts receivable and Actron, a stocking
representative, represented 21.9% of our accounts receivable.

Results of Operations: Years Ended December 31, 2001,
2000, and 1999

Net Revenues

Net revenues were $294.0 million in 2001 compared to
$490.3 million in 2000 and $124.8 million in 1999. Net revenues decreased from
2000 to 2001 due to decreased shipment volume of our products and due to
decreased average selling prices.  The increase from 1999 to 2000 was due to
increased shipment volume of new and existing products and due to our ability to
raise prices slightly in the second half of 2000. Average selling prices
fluctuate due to a number of factors including the overall supply and demand for
our products in the marketplace, maturing product cycles and changes in general
economic conditions. We began to experience a sharp downturn in several of our
markets late in the fourth quarter of 2000, as our customers reacted to
weakening demand for their products. Despite continued difficult market
conditions, in the second half of 2001 we began to see a positive change in
order activities in our products for DVD players, CD-RW drives, PDAs and video
games, as well as the continued strong shipment in our products for desktop PCs
and graphics cards. Sales of our products for the networking and wireless
communications market segments continued to be very weak.

Product Revenues. Product revenues were $258.6 million
in 2001, $475.3 million in 2000 and $118.2 million in 1999. The decrease from
2000 to 2001 was primarily due to decreased shipment volume of our products by
approximately 15.8% and due to decreased average selling prices for our products
of approximately 29.1%.  The increase from 1999 to 2000 was primarily due to
shipments of new products introduced in 2000. Shipping volumes fluctuate due to
overall industry supply and demand.

License Revenues. Revenues from license fees and
royalties were $35.4 million in 2001, $14.9 million in 2000 and $6.6 million in
1999. The increase from both 2000 to 2001 and from 1999 to 2000 was primarily
due to license fees received as part of a legal settlement from Winbond totaling
$20.0 million in 2001 and $10.4 million in 2000. No further payments are
required to be paid under this legal settlement. We anticipate that license
revenues may fluctuate significantly in the future.

Gross Profit

Gross profit was $45.9 million, or gross margin of 15.6%
of net revenues, in 2001, $226.1 million, or 46.1% of net revenues, in 2000, and
$30.1 million, or 24.2% of net revenues, in 1999. Gross profit decreased from
2000 to 2001 primarily due to inventory valuation adjustments, decreases in unit
shipments by approximately 15.8% and decreases in average selling prices by
approximately 29.1% and increases in anticipated warranty costs.  For the year
ended December 31, 2001, inventory valuation adjustments to cost of sales
amounted to $72.2 million. Due to the industry-wide excess inventory built up in
late 2000 and competition our average selling prices declined throughout 2001;
this was more pronounced in the second half of 2001.  Accordingly, during the
fourth quarter of 2001, we wrote down our inventory primarily to reflect the
lower average selling prices at which we expect to sell our inventory.  This
resulted in a fourth quarter net increase in our allowances for excess and
obsolete inventory and lower of cost or market of approximately $10.8 million.
Gross profit increased from 1999 to 2000 due to increased shipments by
approximately 167.7% of existing cost-reduced products, increased shipments of
new, higher margin products, and increased average selling prices by
approximately 57.2% on both older and newer products. We also wrote down $4.3
million and $3.3 million of inventory related to lower of cost or market and
products that we determined to be excess or obsolete during 2000 and 1999,
respectively.

17

---

Operating Expenses

Operating expenses consist of research and development,
sales and marketing, and general and administrative expenses. Operating expenses
were $99.6 million, or 33.9% of net revenues, in 2001, as compared to $88.4
million or 18.0% of net revenues, in 2000, and $34.6 million, or 27.7% of net
revenues, in 1999. The increase in dollars from 2000 to 2001 was due to hiring
additional personnel, development of new products, improvements in our
infrastructure, an increase in our allowance for doubtful accounts, and an
increase in our legal accruals in connection with the Atmel litigation, offset
by the lack of profit sharing expenses. The increase in dollars from 1999 to
2000 was primarily due to increased profit sharing with employees, increased
commissions, and increased salaries and benefits due to hiring additional
personnel. We anticipate that we will continue to devote substantial resources
to research and development, sales and marketing and to general and
administrative activities, and that these expenses will continue to increase in
dollars.

Research and development. Research and development
expenses include costs associated with the development of new products,
enhancements to existing products, quality assurance activities and occupancy
costs. These costs consist primarily of employee salaries and benefits, and the
cost of materials such as wafers and masks. Research and development expenses
were $50.4 million, or 17.1% of net revenues, in 2001, as compared to $41.5
million, or 8.5% of net revenues, in 2000, and $18.2 million, or 14.6% of net
revenues in 1999. The increase in research and development expenses in dollars
from 2000 to 2001 was primarily due to increases in headcount and related costs
of approximately $11.0 million, non-production engineering material expenses of
approximately $2.6 million, depreciation related to purchases of new engineering
equipment of $2.6 million, design costs of approximately $1.4 million and
increased expenses related to engineering and mask costs of approximately
$500,000, offset by a decrease in profit sharing expenses of approximately $8.9
million.  Research and development expenses increased in dollars from 1999 to
2000 primarily due to increases in profit sharing expenses of approximately $8.5
million, headcount and related costs of approximately $8.9 million and material
costs of approximately $3.7 million. We expect research and development expenses
to continue to increase in dollars.

Sales and marketing. Sales and marketing expenses
consist primarily of commissions, headcount and related costs, as well as travel
and entertainment and promotional expenses. Sales and marketing expenses were
$26.8 million, or 9.1% of net revenues, in 2001 as compared to $28.0 million, or
5.7% of net revenues, in 2000, and $10.6 million, or 8.5% of net revenues, in
1999. The decrease in sales and marketing expenses in dollars from 2000 to 2001
was primarily due to decreases in commissions of approximately $2.3 million and
profit sharing expenses of approximately $2.8 million, offset by increases in
headcount related costs of approximately $3.3 million and patent costs of
approximately $756,000.  Sales and marketing expenses in 2000 increased in
dollars from 1999 primarily due to increases in commissions of approximately
$8.7 million owed on higher product revenues, headcount and related costs of
$2.9 million due to increased headcount and the lease of additional space and
profit sharing expenses of approximately $2.7 million. We expect sales and
marketing expenses to increase in dollars as we continue to expand our sales and
marketing efforts.  In addition, fluctuations in revenues will cause
fluctuations in sales and marketing expenses as it impacts our commissions
expenses.

General and administrative. General and administrative
expenses consist of salaries and related costs for administrative, executive and
finance personnel, recruiting costs, professional services and legal fees and
allowances for doubtful accounts. General and administrative expenses were $17.9
million, or 6.1% of net revenues, in 2001 as compared to $15.0 million, or 3.1%
of net revenues, in 2000, and $3.8 million, or 3.0% of net revenues, in 1999.
General and administrative expenses increased in dollars from 2000 to 2001
primarily due to increases in expenses related to our allowance for doubtful
accounts of approximately $1.8 million, headcount and related costs of
approximately $2.0 million, and depreciation and amortization of approximately
$838,000, offset by a decrease in profit sharing expenses of approximately $2.1
million.  Expenses increased in dollars from 1999 to 2000 primarily due to
increases in expenses related to our legal matters of approximately $4.2
million, profit sharing expenses of approximately $2.1 million, headcount and
related costs of approximately $356,000 and depreciation expenses of
approximately $881,000 associated with our new Oracle ERP system, which we
implemented in January 2000.  We anticipate that general and administrative
expenses will continue to increase in dollars as we scale our facilities,
infrastructure, and headcount to support our overall expected growth. We may
also incur additional expenses in connection with the Atmel litigation. For
further information on this litigation see "Legal Proceedings."

Other operating expenses. In 2001, other operating
expenses of $4.6 million, or 1.6% of net revenues, was comprised of $3.9 million
related to one-time charges for asset impairment and a $756,000 period charge
related to an operating lease for an abandoned building. This charge represents
the estimated difference between the total non-discounted future sublease income
and our non-discounted lease commitments relating to this building.  The charge
is an estimate and may be adjusted if we obtain a sublease for the building and
the actual sublease income is significantly different from the estimate.  We may
be unable to secure subtenants for such space due to the recent decrease in
demand for commercial rental space in Silicon Valley.  If we are not successful
in subleasing our unused office space, we may be required to take an additional
period charge for the balance of the future lease cost.

18

---

During 2001, KYE, a company in which we have an equity
investment, completed an initial public offering on the Taiwan Stock Exchange.
Since the initial public offering there has been a significant decline in the
per share price of KYE's common stock.  We have concluded that the decline in
value is "other-than-temporary" and accordingly reduced the value of our equity
investment from $4.6 million to $1.3 million, based on the quoted market price
as of December 31, 2001 for a $3.3 million charge.

A charge of $3.9 million, or 0.8% of net revenues, in 2000,
relates to the expense for in-process research and development incurred during
the acquisition of Agate Semiconductor Inc. Refer also to Note 8 of the Notes to
the Consolidated Financial Statements. The fair value of Agate's patents,
workforce, and the technology currently under development was determined by an
independent appraiser using the income approach for the patents and technology
and the cost approach for the workforce. The income approach discounts expected
future cash flows to present value. The discount rates used in the present value
calculations were derived from a weighted average cost of capital analysis,
adjusted upward by a premium of 20% to reflect additional risks inherent in the
development life cycle. We believe that the pricing model related to this
acquisition is consistent within the high-technology industry. We do not expect
to achieve a material amount of the expense reductions or synergies as a result
of integrating the acquired in-process technology. Therefore, the valuation
assumptions do not include anticipated cost savings. In-process research and
development valued at $3.9 million consisted of a single project to develop a
high-density multiple-bit-per-cell flash memory device targeted for
high-density, mass data storage applications such as digital cameras, MP3 players,
cellular telephones and pagers. At the time of the acquisition the estimated
cost to complete the project was $2.0 to $3.0 million and the design of this
device was approximately 50% complete. The risk adjusted discount rate relating
to in-process technology determined by the independent appraiser to be 40.5%.
As of December 31, 2001, the design of this device was approximately 70%
complete, and the estimated cost to complete the project was approximately $1.0
million.

We expected the multiple-bit-per-cell device to be completed
and to begin to generate cash flows within 12 to 18 months from the date of the
acquisition. However, development of the multiple-bit-per-cell and its viability
remains a significant risk due to the remaining effort to achieve technical
viability, rapidly changing customer markets, uncertain standards for new
products and significant competitive threats from numerous companies. The nature
of the efforts to develop the multiple-bit-per-cell device into a commercially
viable product consists principally of planning, designing and testing
activities necessary to determine that the multiple-bit-per-cell device can meet
market expectations, including functionality and technical requirements. Failure
to bring the multiple-bit-per-cell device to market in a timely manner could
result in a lost opportunity to capitalize on emerging markets. Failure to
achieve the expected levels of revenues and net income from the multiple-bit-
per-cell device will negatively impact the return on the investment expected at
the time of the acquisition and potentially result in impairment of other assets
related to the development activities.

During the quarter ended December 31, 2001, due to the delays
in completing the first multiple-bit-per-cell device, we recorded an expense for
impairment of intangible assets of $590,000. The assets relate to patents
acquired as part of the acquisition of Agate Semiconductor Inc. in December
2000. We reviewed the recoverability of the recorded amounts based on expected
future cash flows (undiscounted and before interest) from use of these assets
and then determined the impairment loss of $590,000 based on the difference
between the net book value of the assets and the estimated fair value of the
assets.

A charge of $2.0 million, or 2% of net revenues, in 1999,
relates to the expense for in-process research and development incurred during
the acquisition of Linvex Technology Corporation. Refer also to Note 8 of the
Notes to the Consolidated Financial Statements. The fair value of Linvex' core
technology, existing products, as well as the technology currently under
development was determined by an independent appraiser using the income
approach, which discounts expected future cash flows to present value. The
discount rates used in the present value calculations were derived from a
weighted average cost of capital analysis, adjusted upward by a premium of 5% to
reflect additional risks inherent in the development life cycle. We expect that
the pricing model related to this acquisition will be considered standard within
the high-technology industry. We do not expect to achieve material expense
reductions or synergies as a result of integrating the acquired in-process
technology. Therefore, the valuation assumptions do not include anticipated cost
savings. In-process research and development valued at $2.0 million consisted of
a single project to combine flash and SRAM memory on a single device (the
ComboMemory device). At the time of the acquisition the estimated cost to
complete the ComboMemory device was $1.1 million and the device was
approximately 42% complete. The risk adjusted discount rate relating to
in-process technology was 40%. During early 2001, the ComboMemory device was
completed and began to generate cash flows.

19

---

Interest and other income. Interest and other income
was approximately $7.4 million, or 2.5% of net revenues, during 2001, as
compared to $10.5 million, or 2.1% of net revenues, during 2000, and $730,000,
or 0.6% of net revenues, during 1999. Interest income decreased in dollars from
2000 to 2001 due to a decrease in cash, cash equivalents and available-for-sale
investments and due to declined interest rates.  Interest income increased
from 1999 to 2000 due to the receipt of cash proceeds from a follow-on public
offering and private placement, which closed on March 27, 2000, and the
underwriters' exercise of an over-allotment option, which closed on April 13,
2000.

Interest expense. Interest expense was approximately
$338,000 during 2001 as compared to $691,000 during 2000 and $214,000 during
1999. Interest expense in 2001 relates to interest and fees under our line of
credit, and in 1999 and 2000 relates to borrowing prior to the completion of a
follow-on public offering and to fee activity under our line of credit. Interest
expense charges are expected to continue and will fluctuate depending on our use
of the line of credit facility.

Provision for (Benefit from) Income Taxes

Our income tax benefit of $17.8 million in 2001 consists
of a 38.0% tax rate on loss before income taxes.  This compares with provision
for income taxes of approximately $41.8 million, or 28.3%, in 2000 and $88,000,
or 2.2%, in 1999. The 2000 effective tax rate was lower than 2001 due to the
reversal of the valuation allowance that was recorded in 1998 and 1999. We
expect our effective tax rate to decrease to approximately 32.0% for 2002.  Our
tax rate may change depending on our profitability and the timing of the
implementation of certain tax planning strategies.  See Note 10 of the Notes to
the Consolidated Financial Statements.

Segment Reporting

Our operations involve the design, development,
manufacturing, marketing and technical support of our nonvolatile memory
products.  We offer low and medium density devices that target a broad range of
existing and emerging applications in the digital consumer, networking, wireless
communications and Internet computing markets. Our products are differentiated
based upon attributes such as density, voltage, access speed, package and
predicted endurance.  We also license our technology for use in non-competing
applications.  Our reportable segments are: the Standard Memory Product Group,
or SMPG, the Application Specific Product Group, or ASPG, and the Special
Product Group, or SPG.  Refer to Note 11 of the Notes to the Consolidated
Financial Statements for revenue and gross profit information by reportable
segment.  Note that during 1999 and 2000 we had different reportable segments,
and therefore the prior period information has been restated to conform to the
new presentation.  Our analysis of the changes for each segment is discussed
below.

SMPG includes our three standard flash memory product
families: the Small-Sector Flash, or SSF, family, the Multi-Purpose Flash, or
MPF, family, and the Many-Time Programmable, or MTP, family and certain custom
products based on these standard flash memory families. These families allow us
to produce products optimized for cost and functionality to support the broad
range of applications that use nonvolatile memory products. SMPG revenues
decreased from $401.2 million in 2000 to $152.2 million in 2001 due primarily to
decreased unit shipments and lower average selling prices. Gross margin
decreased from 42.5% in 2000 to negative 21.7% in 2001 for this segment
primarily due to the inventory valuation adjustments to cost of sales during
2001, decreased unit shipments and decreased average selling prices. SMPG
revenues increased from $111.7 million in 1999 to $401.2 million in 2000 due
primarily to increased unit shipments and higher average selling prices. Gross
margin increased from 19.1% in 1999 to 42.5% in 2000 due to changes in unit
shipment mix of existing cost-reduced products, increased shipments of new,
higher margin products, and increased average selling prices on both older and
newer products.

20

---

ASPG includes FlashBank, Concurrent SuperFlash, Serial Flash,
Firmware Hub, or FWH, and LPC flash products. These products are designed to
address specific applications such as cellular phones, pagers, PDAs, set-top
boxes, hard disk drives and PC BIOS applications.  ASPG also includes flash
embedded controllers and our mass data storage products such as the FlashFlex51,
ADC, ADM, and CompactFlash Card product families, address digital cameras,
Internet appliances, PDAs, MP3 players, set-top boxes and other types of mass
data storage applications. ASPG revenues increased from $56.4 million in 2000 to
$98.1 million in 2001 due primarily to increased unit shipments of our FWH
products, which were introduced in early 2000.  Gross margin decreased from
58.6% in 2000, to 44.6% in 2001 due to decreased average selling prices and
inventory valuation adjustments to cost of sales in 2001. ASPG revenues
increased from $3.3 million in 1999 to $56.4 million in 2000 due primarily to
increased unit shipments of our FWH products.  Gross margin increased from 42.7%
in 1999 to 58.6% in 2000 primarily due to strong shipments of our FWH products,
which were introduced in the second half of 2000.

SPG includes ComboMemory, ROM/RAM Combos, SRAM-related and
other special flash products. SPG revenues decreased from $17.8 million in 2000
to $8.2 million in 2001 due primarily to decreased unit shipments and lower
average selling prices. Gross margin decreased from 42.8% in 2000 to negative
4.8% in 2001 for this segment due to changes in the mix of the types of products
sold between the reporting periods and inventory valuation adjustments to cost
of sales in 2001. SPG revenues increased from $3.3 million in 1999 to $17.8
million in 2000 due primarily to increased unit shipments of our ComboMemory
products. Gross margin increased from 26.9% in 1999 to 42.8% in 2000 due to
changes in unit shipment mix and average selling prices.

Revenue and gross profit related to Technology Licensing was
$35.4 million for 2001, $14.9 million for 2000 and $6.6 million for 1999. The
increase from both 2000 to 2001 and from 1999 to 2000 was primarily due to
license fee received as part of a legal settlement from Winbond totaling $20.0
million in 2001 and $10.4 million in 2000. No further payments are required to
be paid under this legal settlement. We anticipate that license revenues will
fluctuate significantly in the future.

The table below presents information about reported segments
for the three years ended December 31:

`Year Ended December 31, 2001
                        --------------------------
                                         Gross
                          Revenues    Profit (Loss)
                        ------------  ------------
SMPG.................. $    152,246  $    (32,964)
ASPG..................       98,138        43,816
SPG...................        8,234          (395)
Technology Licensing..       35,412        35,412
                        ------------  ------------
                       $    294,030  $     45,869
                        ============  ============



                         Year Ended December 31, 2000
                        --------------------------
                                         Gross
                          Revenues       Profit
                        ------------  ------------
SMPG.................. $    401,162  $    170,522
ASPG..................       56,384        33,049
SPG...................       17,770         7,606
Technology Licensing..       14,945        14,945
                        ------------  ------------
                       $    490,261  $    226,122
                        ============  ============


                         Year Ended December 31, 1999
                        --------------------------
                                         Gross
                          Revenues       Profit
                        ------------  ------------
SMPG.................. $    111,675  $     21,306
ASPG..................        3,284         1,401
SPG...................        3,283           883
Technology Licensing..        6,552         6,552
                        ------------  ------------
                       $    124,794  $     30,142
                        ============  ============`

21

---

Related Party Transactions

In 1996, we acquired a 14% interest in Silicon Technology
Co., Ltd., or Silicon Technology, a privately held Japanese company, for
approximately $939,000 in cash.  Bing Yeh our President, CEO and Board member
also is a member of Silicon Technology's board.  We acquired the interest in
Silicon Technology in order to provide a presence for our products in Japan.  We
now have our own office in Japan, although Silicon Technology continues to sell
our products to smaller customers.  At December 31, 2001, our investment, which
is carried at cost, represented approximately 9% of the outstanding equity of
Silicon Technology.  In 1999, 2000 and 2001, Silicon Technology accounted for
approximately $10.0 million, $12.2 million and $3.7 million, respectively, or
8%, 3% and 1%, respectively, of our net product revenues.  At December 31, 2001,
we had accounts receivable from Silicon Technology of approximately $192,000.
Our sales to Silicon Technology were made at prevailing market prices and the
payment terms are consistent with the payment terms extended to our other
customers.  We are not obligated to provide Silicon Technology with any
additional financing.

In June 1997, Dr. Ronald Chwang joined our Board of
Directors. Dr. Chwang is the Chairman and President of Acer Technology Ventures,
America. Related Acer entities, including Acer Corporation, Acer Peripherals,
Acer Technologies, Apacer and Ambit Microsystems Corp., are our customers. In
2000, we acquired a 10% interest in Apacer, a privately held Taiwanese company,
which is a memory module manufacturer, for approximately $9.9 million in cash.
Bing Yeh our President, CEO and Board member also is a member of Apacer's board.
In 2001, we invested an additional $2.1 million in Apacer.  The investment is
carried at cost. In 1999, 2000 and 2001 the combined Acer entities accounted for
approximately $7.9 million, $22.5 million and $5.8 million, respectively, or 6%,
5% and 2%, respectively, of our net product revenues. At December 31, 2001, we
had accounts receivable from the related Acer entities of approximately
$765,000. Our sales to the related Acer entities were made at prevailing market
prices and the payment terms are consistent with the payment terms extended to
our other customers. In 2000 and 2001, we purchased approximately $7,500 and
$626,000 of products from Apacer. At December 31, 2001, we had accounts payable
to Apacer of approximately $27,000. Our purchases from Apacer are made pursuant
to purchase orders at prevailing market prices.  We do not have a long-term
contract with Apacer to supply us with products.  If Apacer were to terminate
its relationship with us, we believe that we would be able to procure the
necessary products from other production subcontractors. We are not obligated to
provide Apacer with any additional financing.

In 2000, we acquired a 15% interest in PCT, a privately held
Taiwanese company, for approximately $1.5 million in cash.  Bing Yeh our
President, CEO and Board member also is a member of PCT's board.  PCT is one of
our manufacturers' representatives.

PCT earns commissions for point-of-sales transactions to its
customers.  PCT's commissions are paid at the same rate as all of our other
manufacturer's representatives in Asia.  In 2000 and 2001, PCT accounted for 5%
and 2%, or $24.4 million and $5.4 million of net product revenues,
respectively.

In March 2001, PCT established a separate company and
wholly-owned subsidiary, SPT, to provide planning, warehousing, delivery, billing,
collection and other logistic functions for us in Taiwan.  SPT now services
substantially all of our customers based in Taiwan and selected customers
throughout Asia.  Product shipped to SPT is accounted for as consigned inventory
and revenue is recognized when each product has been delivered and considered as
a sale to our end customers by SPT.  We pay SPT a fee based on a percentage of
revenue for each product sold through SPT to our end customers.  The fee paid to
SPT covers the cost of warehousing space and insurance cost of our inventory,
personnel costs required to maintain logistics and information technology
functions and to perform billing and collection of accounts receivable.  SPT
receives extended payment terms and must pay us whether or not they have
collected the accounts receivable.  In 2001, approximately $78.2 million, or
30.3%, of our net product revenues were derived from end customer sales through
SPT, our logistics center.  At December 31, 2001, we had accounts receivable
from SPT of approximately $19.8 million.

We do not have any long-term contracts with SPT or PCT, and
SPT and PCT may cease providing services to us at any time.  If SPT or PCT were
to terminate their relationship with us we would experience a delay in
reestablishing warehousing, logistics and distribution functions which would
harm our business. We are not obligated to provide SPT or PCT with any
additional financing.

22

---

In 2000, we acquired a 1% interest in KYE, a publicly held
Taiwanese company, which is a production subcontractor, for approximately $4.6
million in cash. The investment was made in KYE in order to strengthen the
relationship between us and KYE.  During 2001, KYE completed an initial public
offering on the Taiwan Stock Exchange.  Accordingly, the investment has been
included in long-term available-for-sale investments in the balance sheet as of
December 31, 2001.  The investment was written down to $1.3 million during 2001,
refer to Note 9 of the Notes to the Consolidated Financial Statements. In 2000
and 2001, we purchased approximately $16.7 million and $21.8 million,
respectively, of services from KYE. At December 31, 2001, we had accounts
payable to KYE of approximately $3.6 million. Our purchases from KYE are made
pursuant to purchase orders at prevailing market prices.  We do not have a
long-term contract with KYE to supply us with services.  If KYE were to terminate its
relationship with us we believe that we would be able to procure the necessary
services from other production subcontractors. We are not obligated to provide
KYE with any additional financing.

In 2000, we acquired a 3% interest in PTI, a privately held
Taiwanese company, which is a production subcontractor, for approximately $2.5
million in cash. The investment is carried at cost. The investment was made in
PTI in order to strengthen the relationship between us and PTI.  In 2000 and
2001, we purchased approximately $9.5 million and $9.0 million, respectively, of
services from PTI. At December 31, 2001, we had accounts payable to PTI of
approximately $2.5 million. Our purchases from PTI are made pursuant to purchase
orders at prevailing market prices.  We do not have a long-term contract with
PTI to supply us with services.  If PTI were to terminate its relationship with
us we believe that we would be able to procure the necessary services from other
production subcontractors.  PTI is also our customer and accounted for
approximately $9.0 million, or 2% of our net product revenues in 2000 and none,
or 0% of our net product revenues in 2001.  We are not obligated to provide PTI
with any additional financing.

In 2001, we acquired a 9% interest in GSMC, a privately held
Cayman Islands company with operations in China, which is a wafer foundry under
construction, for approximately $50.0 million in cash.  Bing Yeh our President,
CEO and Board member also is a member of GSMC's board.  This investment is
carried at cost. We anticipate that GSMC will begin to manufacture some of our
products in early 2003.  We do not have a long-term contract with GSMC to supply
us with products.  We are not obligated to provide GSMC with any additional
financing.

Mr. Yasushi Chikagami, a member of our board of directors, is
also a member of the board of directors of Ocean Automation Ltd.  Ocean
Automation Ltd. and certain of its affiliates are our customers.  In 1999 and
2000 the related Ocean entities accounted for approximately $541,000 and $1.4
million, respectively, or 0.4% and 0.3%, respectively, of our net product
revenues.  No sales were made to the Ocean entities in 2001. Our sales to the
Ocean entities were made at prevailing market prices and the payment terms are
consistent with the payment terms extended to our other customers.

Critical Accounting Policies

Our critical accounting policies are as follows:

- Revenue recognition;
- Allowance for sales returns;
- Allowance for doubtful accounts;
- Allowance for excess and obsolete inventory and lower of
cost or market;
- Warranty accrual;
- Litigation costs;
- Valuation of equity investments; and
- Accounting for income taxes.

23

---

Revenue recognition. Sales to direct customers and
foreign stocking representatives are recognized upon shipment of product net of
an allowance for estimated returns. When product is shipped to direct customers
or stocking representatives, or by our distributors or SPT to end users, prior
to recognizing revenue, we also require evidence of the arrangement, the price
is fixed or determinable and collection is reasonably assured.  Our shipping
terms are generally FOB shipping point and payment terms typically range from 30
to 75 days.  Sales to distributors are made primarily under arrangements
allowing price protection and the right of stock rotation on merchandise unsold.
Because of the uncertainty associated with pricing concessions and future
returns, we defer recognition of such revenues, related costs of revenues and
related gross profit until the merchandise is sold by the distributor. Product
shipped to SPT is accounted for as consigned inventory and revenue is recognized
when the products have been delivered and are considered as a sale to our end
customers by SPT.

Most of our technology licenses provide for the payment of
up-front license fees and continuing royalties based on product sales.  For
license and other arrangements for technology that we are continuing to enhance
and refine and under which we are obligated to provide unspecified enhancements,
revenue is recognized over the lesser of the estimated period that we have
historically enhanced and developed refinements to the technology, approximately
one to two years (the upgrade period), or the remaining portion of the upgrade
period from the date of delivery, provided all specified technology and
documentation has been delivered, the fee is fixed or determinable and
collection of the fee is reasonably assured. From time to time, we reexamine the
estimated upgrade period relating to licensed technology to determine if a
change in the estimated upgrade period is needed. Revenue from license or other
technology arrangements where we are not continuing to enhance and refine
technology or are not obligated to provide unspecified enhancements is
recognized upon delivery, if the fee is fixed or determinable and collection of
the fee is reasonably assured.

Royalties received under these arrangements during the
upgrade period are recognized as revenue based on the ratio of the elapsed
portion of the upgrade period to the estimated upgrade period. The remaining
portions of the royalties are recognized ratably over the remaining portion of
the upgrade period. Royalties received after the upgrade period has elapsed are
recognized when reported to us, which generally coincides with the receipt of
payment.

If we make different judgments or utilize different estimates
in relation to the estimated period of technology enhancement and development,
the amount and timing of our license and royalty revenues could be materially
different.

Allowance for sales returns.  We maintain allowances
for sales returns for estimated product returns by our customers.  We estimate
our allowance for sales returns based on our historical return experience,
current economic trends, changes in customer demand, known returns we have not
received and other assumptions. If we make different judgments or utilize
different estimates, the amount and timing of our revenue could be materially
different.

Allowance for doubtful accounts.  We maintain
allowance for doubtful accounts for estimated losses from the inability of our
customers to make required payments.  We evaluate our allowance for doubtful
accounts based on the aging of our accounts receivable, the financial condition
of our customers and their payment history, our historical write-off experience
and other assumptions. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.

Allowance for excess and obsolete inventory and lower of
cost or market. Our inventories are stated at the lower of cost (determined
on a first-in, first-out basis) or market value. We typically plan our
production and inventory levels based on internal forecasts of customer demand,
which are highly unpredictable and can fluctuate substantially. The value of our
inventory is dependent on our estimate of future average selling prices, and, if
our projected average selling prices are over estimated, we may be required to
adjust our inventory value to reflect the lower of cost or market. Our
inventories include high technology parts and components that are specialized in
nature or subject to rapid technological obsolescence. We maintain allowance for
inventory for potentially excess and obsolete inventories and those inventories
carried at costs that are higher than their market values. If we determine that
market conditions are less favorable than those projected by management, such as
an unanticipated decline in average selling prices or demand not meeting our
expectations, additional inventory write-downs may be required.

24

---

Warranty accrual. Our products are generally subject
to warranty and we provide for the estimated future costs of repair, replacement
or customer accommodation upon shipment of the product in the accompanying
statements of operations. Our warranty accrual is estimated based on historical
claims compared to historical revenues and assumes that we have to replace
products subject to a claim.  For new products, we use our historical percentage
for the appropriate class of product.  Should actual product failure rates
differ from our estimates, revisions to the estimated warranty liability would
be required.

Litigation costs. From time to time, we are also
involved in other legal actions arising in the ordinary course of business.
While we have accrued certain amounts for the estimated legal costs associated
with defending these matters, there can be no assurance the Atmel complaint or
other third party assertions will be resolved without costly litigation, in a
manner that is not adverse to our financial position, results of operations or
cash flows or without requiring royalty payments in the future which may
adversely impact gross margins. As of December 31, 2001, no estimate can be made
of the possible loss or possible range of loss associated with the resolution of
these contingencies.  If additional information becomes available such that we
estimate that there is a possible loss or possible range of loss associated with
these contingencies then we would record the minimum estimated liability, which
could materially impact our results of operations and financial position.

Valuation of equity investments. We hold minority
interests in companies having operations in the semiconductor industry.  We
record an investment impairment charge when we believe an investment has
experienced a decline in value that is other than temporary.  Future adverse
changes in market conditions or poor operating results of underlying investments
could result in losses or an inability to recover the carrying value of the
investments, thereby possibly requiring an impairment charge in the future.  The
recorded value of our equity investments at December 31, 2001 is $68.3
million.

Accounting for income taxes.  If appropriate, we
record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized.  While we have considered future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, in the event we were to
determine that we would be unable to realize all or part of our deferred tax
assets in the future, an adjustment to the deferred tax asset would be a charge
to income in the period such determination was made.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board,
or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 133,
"Accounting for Derivatives and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133," which deferred the effective date until the first fiscal
year beginning after June 15, 2000. In June 2000, the FASB issued SFAS Statement
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of SFAS No. 133." SFAS No. 138 amends certain terms and
conditions of SFAS No. 133. SFAS No. 133 requires that all derivative
instruments be recognized at fair value as either assets or liabilities in the
statement of financial position. The accounting for changes in the fair value
(i.e., gains or losses) of a derivative instrument depends on whether it has
been designated and qualifies as part of a hedging relationship and further, on
the type of hedging relationship. We adopted SFAS No. 133, as amended, in our
quarter ending March 31, 2001.  We do not hold and have not held any derivative
instruments, and accordingly, the adoption of SFAS No. 133 did not have a
material impact on our financial statements.

In July 2001, the FASB issued SFAS No. 141, "Business
Combinations." SFAS No. 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. We believe the adoption of SFAS No. 141 to date has not had
a significant impact on our financial statements.

In July 2001, the FASB issued SFAS No. 142, "Goodwill
and Other Intangible Assets," which is effective for fiscal years beginning
after December 15, 2001. SFAS No. 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the standard includes
provisions upon adoption for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the testing for impairment of existing goodwill and other
intangibles.  We believe the adoption of SFAS No. 142 will not have a
significant impact on our financial position and results of operations.

25

---

In October 2001, the FASB issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of."  SFAS No. 144 applies to all long-lived assets
(including discontinued operations) and consequently amends Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Division of a Business."  SFAS No. 144
develops one accounting model for long-lived assets that are to be disposed of
by sale and requires the measurement to be at the lower of book value or fair
value less cost to sell.  Additionally, SFAS No. 144 expands the scope of
discontinued operations to include all components of an entity with operations
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We
believe the adoption of SFAS No. 144 will not have a significant impact on our
financial statements.

Liquidity and Capital Resources

Operating activities. Our operating activities
used cash of $22.5 million in 2001 primarily due to net loss of $29.0 million,
increases in trade accounts receivable from related party of $4.0 million and
inventory of  $108.9 million, and decreases in trade accounts payable from
related and unrelated parties of $15.2 million, accrued expenses of $17.2
million and deferred revenue of $9.8 million.  Cash used in operating activities
was reduced by decreases in trade accounts receivable from unrelated parties of
$55.1 million, other current and non-current assets of $3.4 million, and
non-cash adjustments of $103.0 million, primarily relating to our provision for
sales returns of $32.2 million, inventory valuation adjustments of $73.9
million, depreciation and amortization of $9.8 million, our increased provision
for doubtful accounts receivable of $2.3 million and other operating expenses of
$4.6 million, and offset by $19.9 million from the change in deferred income
taxes. The decrease in trade accounts receivable from unrelated parties relates
to decreased shipment volume and decreased average selling prices.  The increase
in accounts receivable-related parties relates to SPT, our new logistics center
in Taiwan.  Cash provided by operations was $43.5 million in 2000 and relates
primarily to net income of $105.7 million offset by accounts receivable increase
of $81.6 million and an increase in accounts receivable from related parties of
$14.4 million, all due to increased sales in 2000. Increases in trade accounts
payable to unrelated parties of $20.0 million, trade accounts payable to related
parties of $7.3 million, and accrued expenses of $28.5 million and deferred
revenue of $11.1 million were offset by increases in inventory of $47.8 million
and increases in other current and non-current assets of $11.6 million.

Investing activities. Our investing activities
provided cash of approximately $2.1 million during 2001, primarily due to a
total of $68.4 million cash from the excess sales and maturities of
available-for-sale investments over the purchases of such investments, offset by $52.2
million used to acquire equity investments, of which $50.0 million was invested
in GSMC.  GSMC is a Cayman Islands company with wafer foundry operations under
construction in China. Further, we invested approximately $13.6 million in
capital expenditures and used approximately $498,000 of cash for the final
payment of our Agate acquisition.  Cash used in investing activities of $173.1
million during 2000 consisted primarily of investments of cash in available-for-sale
marketable securities. We also made strategic equity investments in
privately held companies which are either subcontractors to our production
process or customers.  Refer to Note 12 of the Notes to the Consolidated
Financial Statements.  In addition, we acquired equipment, invested in
enterprise resource planning software, and made leasehold improvements. We plan
to continue to invest in capital equipment to be used primarily for test
equipment and design engineering tools for research and development, information
systems infrastructure, and leasehold improvements.

Financing activities. Our financing activities
provided cash of approximately $5.0 million in 2001 and $237.5 million during
2000. During 2001, cash provided was from $3.7 million of common stock issued
under our employee stock purchase plan and the exercise of employee stock
options and $1.8 million related to a loan from a landlord, offset by $491,000
in loan repayments and other financing activities.  In 2000, cash was primarily
provided from the issuance of common stock for $257.5 million and primarily
relates to net proceeds from a follow-on public offering in which we issued and
sold 12,075,000 shares of common stock, a private placement in which we issued
and sold 504,000 shares of common stock, and $3.8 million from common stock
issued under the employee stock purchase plan and the exercise of employee stock
options, offset by the repayment of our entire line of credit at the end of
March 2000.

26

---

Principal sources of liquidity at December 31, 2001 consisted
of $166.6 million of cash, cash equivalents, and short-term and long-term
available-for-sale investments and the line of credit. As of December 31, 2001
we had no borrowing on our line of credit of up to $35.0 million. Under the
agreement, our borrowing is limited to 80.0% of eligible world-wide accounts
receivable, and is also reduced by any letters of credit issued under our line
of credit.  As of December 31, 2001, there was approximately $3.6 million
outstanding in letters of credit and $2.3 million available under this line. The
line bears interest at a rate of the bank's reference rate plus 0.5% (6.0% at
December 31, 2001), with a minimum interest rate of 6.0%. Under the agreement,
we are required to comply with certain covenants including maintaining a
specified level of tangible net worth and we are not permitted to pay a
dividend. While we maintained the specified level of tangible net worth, we were
in default of certain other covenants and reporting obligations. On February 28,
2002, the lender granted a waiver of these defaults and has also waived future
compliance with certain covenants and reporting obligations, subject to certain
conditions, through the maturity of the line of credit in September 2002.  We
must pay an unused line fee at the annual rate of one quarter of one percent on
the unused portion.

Purchase Commitments. In December 2000, we committed,
subject to certain business conditions, to prepay $50.0 million to a vendor in
2001 to secure increased wafer capacity in 2002 and 2003.  In the second quarter
of 2001, in response to weakening product demand and economic conditions, we
renegotiated the commitment to defer the payment to 2002.  As of December 31,
2001, we had prepaid a total of $5.0 million towards this commitment, which is
included in other current assets on the balance sheet.  In addition, we had
outstanding purchase commitments with our foundry vendors of approximately $10.3
million for delivery in 2002.

Lease Commitments.  We have long-term, non-cancelable
building lease commitments.  We are currently seeking subtenants for our unused
office space. During the third quarter of 2001, we recorded a period charge to
other operating expense of approximately $756,000 relating to an operating lease
for an abandoned building.  This charge represents the estimated difference
between the total non-discounted future sublease income and our non-discounted
lease commitments relating to this building. The charge is an estimate as of
December 31, 2001 and may be adjusted if we obtain a sublease for the building
and the actual sublease income is significantly different from the estimate. We
may be unable to secure subtenants for such space due to the recent decrease in
demand for commercial rental space in Silicon Valley.  See also "Business
Risks - If we are not successful in subleasing our unused office space, we may be
required to take a period charge for the difference between the total future
sublease income and our lease cost."

Future payments due under building lease and purchase
commitments as of December 31 (in thousands):

`Building    Purchase
                                                     Lease    Commitments    Total
                                                   ---------  -----------  ---------
2002............................................. $   4,869  $    55,334  $  60,203
2003.............................................     4,980           --      4,980
2004.............................................     5,131           --      5,131
2005.............................................     3,563           --      3,563
2006.............................................     2,434           --      2,434
Thereafter.......................................     8,471           --      8,471
                                                   ---------  -----------  ---------
                                                  $  29,448  $    55,334  $  84,782
                                                   =========  ===========  =========`



Stock Purchase Plan.  In September 2001, our board of
directors authorized the purchase of an aggregate of up to  $15.0 million of our
common stock. The purchases may be made in the open market at prevailing market
prices or in negotiated transactions off the market, subject to compliance with
applicable provisions of the California Corporation Code and in accordance with
applicable federal and state securities laws and regulations.  The stock
purchase program will continue until September 30, 2002 unless earlier revoked
by our board of directors.  As of December 31, 2001, no shares had been
purchased under this program.

We believe that our cash balances, together with funds
expected to be generated from operations and the line of credit availability,
will be sufficient to meet our projected working capital and other cash
requirements through at least the next twelve months. However, there can be no
assurance that future events will not require us to seek additional borrowings
or capital and, if so required, that such borrowing or capital will be available
on acceptable terms.  Factors that could affect our cash used or generated from
operations and as a result, our need to seek additional borrowings or capital
include:

27

---

- the average selling prices of our products;
- customer demand for our products;
- the need to secure future wafer production capacity from
our suppliers;
- the timing of significant orders and of license and
royalty revenue; and
- unanticipated research and development expenses
associated with new product introductions.

Please also see "Business Risks - Our operating results
fluctuate significantly, and an unanticipated decline in revenues may disappoint
securities analysts or investors and result in a decline in our stock
price."

28

---



Business Risks

Risks Related to Our Business

Our operating results fluctuate significantly, and an
unanticipated decline in revenues may disappoint securities analysts or
investors and result in a decline in our stock price.

Although we were profitable in 2000, we incurred net
losses for 2001, and in fiscal 1997, 1998 and 1999.  Our operating results have
fluctuated significantly and our past financial performance should not be used
to predict future operating results. Our recent quarterly and annual operating
results have fluctuated, and may continue to fluctuate, due to the following
factors, all of which are difficult to forecast and many of which are out of our
control:

- the availability, timely delivery and cost of wafers or
other manufacturing and assembly services from our suppliers;
- competitive pricing pressures and related changes in
selling prices;
- fluctuations in manufacturing yields and significant
yield losses;
- new product announcements and introductions of competing
products by us or our competitors;
- product obsolescence;
- lower of cost or market inventory adjustments;
- changes in demand for, or in the mix of, our
products;
- the gain or loss of significant customers;
- market acceptance of products utilizing our
SuperFlashâ
 technology;
- changes in the channels through which our products are
distributed and the timeliness of receipt of distributor resale
information;
- exchange rate fluctuations;
- general economic, political and environmental-related
conditions, such as natural disasters;
- difficulties in forecasting, planning and management of
inventory levels;
- unanticipated research and development expenses
associated with new product introductions; and
- the timing of significant orders and of license and
royalty revenue.

As recent experience confirms, a downturn in the market for
products such as personal computers and cellular telephones that incorporate our
products can also harm our operating results.



Our operating expenses are relatively fixed, and we order
materials in advance of anticipated customer
demand.  Therefore, we have limited ability to reduce
expenses quickly in response to any revenue shortfalls.



Our operating expenses are relatively fixed, and we
therefore have limited ability to reduce expenses quickly in response to any
revenue shortfalls.  Consequently, our operating results will be harmed if our
revenues do not meet our projections.  We may experience revenue shortfalls for
the following reasons:



- sudden drops in consumer demand which may cause customers
to cancel backlog, push out shipment schedules, or reduce new orders, possibly
due to a slowing economy or inventory corrections among our
customers;

29

---

- significant declines in selling prices that occur because
of competitive price pressure during an over-supply market environment;

- sudden shortages of raw materials for fabrication, test
or assembly capacity constraints that lead our suppliers to allocate available
supplies or capacity to other customers which, in turn, harm our ability to meet
our sales obligations; and

- the reduction, rescheduling or cancellation of customer
orders.



During 2001 we incurred inventory valuation adjustments of
$72.2 million and we may incur additional significant inventory valuation
adjustments in the future.



We typically plan our production and inventory levels
based on internal forecasts of customer demand, which are highly unpredictable
and can fluctuate substantially. The value of our inventory is dependent on our
estimate of future average selling prices, and, if our projected average selling
prices are over estimated, we may be required to adjust our inventory value to
reflect the lower of cost or market. As of December 31, 2001, we had $108.2
million of inventory on hand, an increase of  $34.9 million, or 47.7%, from
2000. Total valuation adjustments to inventory were $3.3 million in 1999, $4.3
million in 2000 and $72.2 million in 2001. Due to the large number of units in
our inventory, even a small change in average selling prices could result in a
significant adjustment and could harm our financial results.



Cancellations or rescheduling of backlog may result in
lower future revenue and harm our business.



Due to possible customer changes in delivery schedules and
cancellations of orders, our backlog at any particular date is not necessarily
indicative of actual sales for any succeeding period.  A reduction of backlog
during any particular period, or the failure of our backlog to result in future
revenue, could harm our business.  We began to experience a sharp downturn in
several of our markets late in the fourth quarter of 2000, as our customers
reacted to weakening demand for their products.  Although we had improvements in
total units shipped in the third and fourth quarter of 2001, revenues declined
in 2001 due to declines in total shipment volume for 2001 and decreased average
selling prices. Our business could be harmed by industry-wide fluctuations in
the future.



Our business may suffer due to risks associated with
international sales and operations.



During 1999, 2000 and 2001, our export product and licensing
revenues accounted for approximately 89.1%, 84.3% and 90.3% of our net
revenues, respectively.  Our international business activities are subject to a
number of risks, each of which could impose unexpected costs on us that would
harm our operating results.  These risks include:

- difficulties in complying with regulatory requirements and standards;
- tariffs and other trade barriers;
- costs and risks of localizing products for foreign countries;
- reliance on third parties to distribute our products;
- extended accounts receivable payment cycles;
- potentially adverse tax consequences;
- limits on repatriation of earnings; and
- burdens of complying with a wide variety of foreign laws.

30

---



In addition, we have made equity investments in companies
with operations in China, Japan and Taiwan.  The value of our investments is
subject to the economic and political conditions particular to their industry,
their countries and to the global economy.  If we determine that a change in the
recorded value of an investment is other than temporary, we will adjust the
value of the investment.  Such an expense could have a negative impact on our
operating results. In the fourth quarter of 2001, we wrote down our investment
in KYE by $3.3 million to $1.3 million due to an other than temporary decline in
its market value.



We derived 80.8%, 77.6% and 80.7% of our net product
revenues from Asia during 1999, 2000 and 2001, respectively.  Additionally,
substantially all of our wafer suppliers and packaging and testing
subcontractors are located in Asia.  Any kind of economic, political or
environmental instability in this region of the world can have a severe negative
impact on our operating results due to the large concentration of our production
and sales activities in this region.  For example, during 1997 and 1998, several
Asian countries where we do business, such as Japan, Taiwan and Korea,
experienced severe currency fluctuation and economic deflation, which negatively
impacted our revenues and also negatively impacted our ability to collect
payments from customers.  During this period, the lack of capital in the
financial sectors of these countries made it difficult for our customers to open
letters of credit or other financial instruments that are guaranteed by foreign
banks.  Finally, the economic situation during this period exacerbated a decline
in selling prices for our products as our competitors reduced product prices to
generate needed cash.



It should also be noted that we are greatly impacted by the
political, economic and military conditions in Taiwan.  Taiwan and China are
continuously engaged in political disputes and both countries have continued to
conduct military exercises in or near the other's territorial waters and
airspace.  Such disputes may continue and even escalate, resulting in an
economic embargo, a disruption in shipping or even military hostilities.
Additionally, we believe the economic uncertainty fueled by the September 11,
2001 terrorist attacks in the United States has caused our customer base to
become more cautious.  Any of these events could delay production or shipment of
our products.  Any kind of activity of this nature or even rumors of such
activity could harm our operations, revenues, operating results, and stock
price.



We do not typically enter into long-term contracts with
our customers, and the loss of a major customer could harm our business.



We do not typically enter into long-term contracts with our
customers.  In addition, we cannot be certain as to future order levels from our
customers.  In the past, when we have entered into a long-term contract, the
contract has generally been terminable at the convenience of the customer.



We depend on stocking representatives, distributors and
our logistics center to generate a majority of our revenues.



We rely on stocking representatives and distributors to
establish and maintain customer relationships and to sell our products.   These
stocking representatives and distributors could discontinue their relationship
with us or discontinue selling our products at any time.  The majority of our
stocking representatives and distributors are located in Asia.



Since March 2001, we have been out-sourcing our customer
service logistics in Taiwan to Silicon Professional Technology Ltd., or SPT.
SPT is a wholly-owned subsidiary of one of our stocking representatives in
Taiwan, Professional Computer Technology Limited, or PCT.  SPT provides
planning, warehousing, delivery, billing, collection and other logistic
functions for us in Taiwan.  SPT now services substantially all of our end
customers based in Taiwan and selected end customers throughout Asia.  Products
shipped to SPT are accounted for as consigned inventory, and revenue is
recognized when the products have been delivered and are considered as a sale to
our end customers by SPT.  For the year ended December 31, 2001, SPT serviced
end customer sales accounting for 30.3% of our net product revenues recognized.



Product shipments to Asia accounted for 80.8%, 77.6% and
80.7% of net product revenues for 1999, 2000 and 2001, respectively.  For
further description of our relationships with PCT and SPT, please refer to "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operation - Related Party Transactions."



We ship to, and have accounts receivable from, OEMs, ODMs,
CEMs, stocking representatives, domestic distributors, and our logistics center.
Our logistics center, stocking representatives and domestic
distributors reship our products to our end customers, including OEMs, ODMs,
CEMs and end users.  In 1999, Actron, a stocking representative, represented
12.4% of our net product revenues.  No stocking representative or domestic
distributor serviced more than 10.0% of our customer sales in 2000 or 2001.

31

---



No single customer, which we define as an OEM, ODM, CEM, or
end user that purchases product directly from us or through our logistics
center, represented 10.0% or more of our net product revenues during 1999, 2000
and 2001.



We do not have any long-term contracts with SPT or PCT, and
SPT or PCT may cease providing services to us at any time.  If SPT or PCT were
to terminate their relationship with us we would experience a delay in
reestablishing warehousing, logistics and distribution functions, which would
harm our business.



The loss of our relationship with any of these stocking
representatives, logistics center or distributors, or any other significant
stocking representative or distributor could harm our operating results by
impairing our ability to sell our products to our end customers.



We depend on a limited number of foreign foundries to
manufacture our products, and these foundries
may not be able to satisfy our manufacturing requirements,
which could cause our revenues to decline.



We outsource substantially all of our manufacturing and
testing activities.  We currently buy all of our wafers and sorted die from a
limited number of suppliers.  Substantially all of our products are manufactured
by four foundries, TSMC in Taiwan, Sanyo and Seiko-Epson in Japan, and Samsung
in Korea.  We anticipate that these foundries, together with National
Semiconductor in the United States, Nanya and Vanguard in Taiwan and Oki in
Japan, will manufacture the majority of our products in 2002.  On March 6, 2001,
we invested $50.0 million in GSMC, a Cayman Islands company, for a wafer foundry
project located in Shanghai, China.  We anticipate that GSMC will begin to
manufacture some of our products in early 2003. If these suppliers fail to
satisfy our requirements on a timely basis at competitive prices we could suffer
manufacturing delays, a possible loss of revenues or higher than anticipated
costs of revenues, any of which could harm our operating results.



Our revenues may be impacted by our ability to obtain
adequate wafer supplies from our foundries. The foundries with which we
currently have arrangements, together with any additional foundry at which
capacity might be obtained, may not be willing or able to satisfy all of our
manufacturing requirements on a timely basis at favorable prices.  In addition,
we have encountered delays in qualifying new products and in ramping-up new
product production and we could experience these delays in the future.  We are
also subject to the risks of service disruptions, raw material shortages and
priceincreases by our foundries.  Such disruptions, shortages and price
increases could harm our operating results.



If we are unable to increase our manufacturing capacity,
our revenues may decline.



In order to grow, we need to increase our present
manufacturing capacity.  Events that we have not foreseen could arise which
would limit our capacity.  We have a remaining commitment to prepay a total of
$45.0 million in  2002, subject to certain economic and business conditions, to
secure increased wafer capacity in 2002 and 2003. We are continually engaged in
attempting to secure additional manufacturing capacity to support our long-term
growth.  Similar to our $50.0 million investment in GSMC, we may determine that
it is necessary to invest substantial capital in order to secure appropriate
production capacity commitments.  If we cannot secure additional manufacturing
capacity on acceptable terms, our ability to grow will be impaired and our
operating results will be harmed.



If we are not successful in subleasing our unused office
space, we may be required to take a period charge for the difference between the
total future sublease income and our lease cost.



We have long-term, non-cancelable building lease commitments.
We are currently in the process of locating subtenants for our unused office
space.  We may be unable to secure subtenants for this space due to the recent
decrease in demand for commercial rental space in Silicon Valley. During the
third quarter of 2001, we recorded a period charge to other operating expense of
approximately $756,000 relating to an operating lease for an abandoned building.
This charge represents the estimated difference between the total non-discounted
future sublease income and our non-discounted lease commitments relating to this
building. The charge is an estimate as of December 31, 2001 and may be adjusted
if we obtain a sublease for the building and the actual sublease income is
significantly different from the estimate.  If we are unable to secure
subtenants, we may be required to take additional period charges for the
balance of the future lease cost, and this will harm our operating results.

32

---



Our cost of revenues may increase if we are required to
purchase manufacturing capacity in the future.



To obtain additional manufacturing capacity, we may be
required to make deposits, equipment purchases, loans, joint ventures, equity
investments or technology licenses in or with wafer fabrication companies.
These transactions could involve a commitment of substantial amounts of our
capital and technology licenses in return for production capacity.  We may be
required to seek additional debt or equity financing if we need substantial
capital in order to secure this capacity and we cannot assure you that we will
be able to obtain such financing.



If our foundries fail to achieve acceptable wafer
manufacturing yields, we will experience higher costs of revenues and reduced
product availability.



The fabrication of our products requires wafers to be
produced in a highly controlled and ultra-clean environment.  Semiconductor
companies that supply our wafers from time to time have experienced problems
achieving acceptable wafer manufacturing yields.  Semiconductor manufacturing
yields are a function of both our design technology and the foundry's
manufacturing process technology.  Low yields may result from marginal design or
manufacturing process drift.  Yield problems may not be identified until the
wafers are well into the production process, which often makes them difficult,
time consuming and costly to correct.  Furthermore we rely on independent
foundries for our wafers which increases the effort and time required to
identify, communicate and resolve manufacturing yield problems.  If our
foundries fail to achieve acceptable manufacturing yields, we will experience
higher costs of revenues and reduced product availability, which could harm our
operating results.



If our foundries discontinue the manufacturing processes
needed to meet our demands, or failto upgrade the technologies needed to
manufacture our products, we may face production delays and lower revenues.



Our wafer and product requirements typically represent a
small portion of the total production of the foundries that manufacture our
products.  As a result, we are subject to the risk that a foundry will cease
production on an older or lower-volume manufacturing process that it uses to
produce our parts.  Additionally, we cannot be certain our foundries will
continue to devote resources to advance the process technologies on which the
manufacturing of our products is based.  Each of these events could increase our
costs and harm our ability to deliver our products on time.



Our dependence on third-party subcontractors to assemble
and test our products subjects us to a number of risks, including an inadequate
supply of products and higher costs of materials.



We depend on independent subcontractors to assemble and
test our products.  Our reliance on these subcontractors involves the following
significant risks:



- reduced control over delivery schedules and quality;
- the potential lack of adequate capacity during periods of strong
demand;
- difficulties selecting and integrating new subcontractors;
- limited warranties on products supplied to us;
- potential increases in prices due to capacity shortages and other factors;
and
- potential misappropriation of our intellectual property.



These risks may lead to increased costs, delayed product
delivery or loss of competitive advantage, which would harm our profitability
and customer relationships.

33

---



Because our flash memory products typically have lengthy
sales cycles, we may experience substantial delays between incurring expenses
related to research and development and the generation of revenues.



Due to the flash memory product cycle we usually require
more than nine months to realize volume shipments after we first contact a
customer.  We first work with customers to achieve a design win,which
may take three months or longer.  Our customers then complete the design,
testing and evaluation process and begin to ramp up production, a period which
typically lasts an additional six months or longer.  As a result, a significant
period of time may elapse between our research and development efforts and our
realization of revenue, if any, from volume purchasing of our products by our
customers.



We face intense competition from companies with
significantly greater financial, technical and marketing resources that could
harm sales of our products.



We compete with major domestic and international
semiconductor companies, many of which have substantially greater financial,
technical, marketing, distribution, and other resources than we do.  Many of our
competitors have their own facilities for the production of semiconductor memory
components and have recently added significant capacity for such production.
Our memory products, which presently account for substantially all of our
revenues, compete principally against products offered by AMD, Atmel, Intel,
Macronix, Sanyo, STMicroelectronics and Winbond.  If we are successful in
developing our high-density products, these products will compete principally
with products offered by AMD, Atmel, Fujitsu, Hitachi, Intel, Mitsubishi,
Samsung, SanDisk, Sharp Electronics, STMicroelectronics and Toshiba, as well as
any new entrants to the market.



In addition, we may in the future experience direct
competition from our foundry partners.  We have licensed to our foundry partners
the right to fabricate products based on our technology and circuit design, and
to sell such products worldwide, subject to our receipt of royalty payments.



Competition may also come from alternative technologies such
as ferroelectric random access memory, or FRAM, or other developing
technologies.



Our markets are subject to rapid technological change and,
therefore, our success depends on our ability to develop and introduce new
products.



The markets for our products are characterized by:



- rapidly changing technologies;
- evolving and competing industry standards;
- changing customer needs;
- frequent new product introductions and
enhancements;
- increased integration with other functions; and
- rapid product obsolescence.



To develop new products for our target markets, we must
develop, gain access to and use leading technologies in a cost-effective and
timely manner and continue to expand our technical and design expertise.  In
addition, we must have our products designed into our customers' future products
and maintain close working relationships with key customers in order to develop
new products that meet their changing needs.



In addition, products for communications applications are
based on continually evolving industry standards.  Our ability to compete will
depend on our ability to identify and ensure compliance with these industry
standards.  As a result, we could be required to invest significant time and
effort and incur significant expense to redesign our products and ensure
compliance with relevant standards.  We believe that products for these
applications will encounter intense competition and be highly price sensitive.
While we are currently developing and introducing new products for these
applications, we cannot assure you that these products will reach the market on
time, will satisfactorily address customer needs, will be sold in high volume,
or will be sold at profitable margins.

34

---



We cannot assure you that we will be able to identify new
product opportunities successfully, develop and bring to market new products,
achieve design wins or respond effectively to new technological changes or
product announcements by our competitors.  In addition, we may not be successful
in developing or using new technologies or in developing new products or product
enhancements that achieve market acceptance.  Our pursuit of necessary
technological advances may require substantial time and expense.  Failure in any
of these areas could harm our operating results.



Our future success depends in part on the continued
service of our key design engineering, sales, marketing and executive personnel
and our ability to identify, recruit and retain additional personnel.



We are highly dependent on Bing Yeh, our President and
Chief Executive Officer, as well as the other principal members of our
management team and engineering staff.  There is intense competition for
qualified personnel in the semiconductor industry, in particular the highly
skilled design, applications and test engineers involved in the development of
flash memory technology.  Competition is especially intense in Silicon Valley,
where our corporate headquarters is located.  We may not be able to continue to
attract and retain engineers or other qualified personnel necessary for the
development of our business or to replace engineers or other qualified personnel
who may leave our employ in the future.  Our anticipated growth is expected to
place increased demands on our resources and will likely require the addition of
new management and engineering personnel and the development of additional
expertise by existing management personnel.  The failure to recruit and retain
key design engineers or other technical and management personnel could harm our
business.



Our ability to compete successfully depends, in part, on
our ability to protect our intellectual property rights.



We rely on a combination of patent, trade secrets,
copyrights, mask work rights, nondisclosure agreements and other contractual
provisions and technical measures to protect our intellectual property rights.
Policing unauthorized use of our products, however, is difficult, especially in
foreign countries.  Litigation may continue to be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity.  Litigation could result in
substantial costs and diversion of resources and could harm our business,
operating results and financial condition regardless of the outcome of the
litigation.   We own 43 patents in the United States relating to our products
and processes, and have filed for several more.  In addition, we hold several
patents in Europe and Canada, and have filed several foreign patent applications
in Europe, Japan, Korea, Taiwan and Canada.  We cannot assure you that any
pending patent application will be granted.  Our operating results could be
harmed by the failure to protect our intellectual property.



If we are accused of infringing the intellectual property
rights of other parties we may become subject to time-consuming and costly
litigation.  If we lose, we could suffer a significant impact on our business
and be forced to pay damages.



Third parties may assert that our products infringe their
proprietary rights, or may assert claims for indemnification resulting from
infringement claims against us.  Any such claims may cause us to delay or cancel
shipment of our products or pay damages that could harm our business, financial
condition and results of operations.  In addition, irrespective of the validity
or the successful assertion of such claims, we could incur significant costs in
defending against such claims.



Over the past four years we were sued both by Atmel
Corporation and Intel Corporation regarding patent infringement issues and sued
Winbond Electronics Corporation regarding our contractual relationship with
them.  Significant management time and financial resources have been devoted to
defending these lawsuits.  We settled with Intel in May 1999, with Winbond in
October 2000, and the Atmel litigation is ongoing.

35

---



In addition to the Atmel, Intel and Winbond actions, we
receive from time to time, letters or communications from other companies
stating that such companies have patent rights that involve our products.  Since
the design of all of our products is based on SuperFlash technology, any legal
finding that the use of our SuperFlash technology infringes the patent of
another company would have a significantly negative effect on our entire product
line and operating results.  Furthermore, if such a finding were made, there can
be no assurance that we could license the other company's technology on
commercially reasonable terms or that we could successfully operate without such
technology.  Moreover, if we are found to infringe, we could be required to pay
damages to the owner of the protected technology and could be prohibited from
making, using, selling, or importing into the United States any products that
infringe the protected technology.  In addition, the management attention
consumed by and legal cost associated with any litigation could harm our
operating results.



Public announcements may hurt our stock price.  During
the course of lawsuits there may be public announcements of the results of
hearings, motions, and other interim proceedings or developments in the
litigation.  If securities analysts or investors perceive these results to be
negative, it could harm the market price of our stock.



Our litigation may be expensive, may be protracted and
confidential information may be compromised.  Whether or not we are
successful in our lawsuit with Atmel, we expect this litigation to continue to
consume substantial amounts of our financial and managerial resources.  While we
have accrued certain amounts for the estimated legal costs associated with
defending this matter, at any time Atmel may file additional claims against us,
which could increase the risk, expense and duration of the litigation.  Further,
because of the substantial amount of discovery required in connection with this
type of litigation, there is a risk that some of our confidential information
could be compromised by disclosure.



If an earthquake or other natural disaster strikes our
manufacturing facility or those of our suppliers, we would be unable to
manufacture our products for a substantial amount of time and we would
experience lost revenues.



Our corporate headquarters are located in California near
major earthquake faults.  In addition, some of our suppliers are located near
fault lines.  In the event of a major earthquake or other natural disaster near
our headquarters, our operations could be harmed.  Similarly, a major earthquake
or other natural disaster such as typhoon near one or more of our major
suppliers, like the earthquake in September 1999 or the typhoon in September
2001 that occurred in Taiwan could potentially disrupt the operations of those
suppliers, which could then limit the supply of our products and harm our
business.



Prolonged electrical power outages, energy shortages, or
increased costs of energy could harm our business.

Our design and process research and development
facilities and our corporate offices are located in California, which is
currently susceptible to power outages and shortages as well as increased energy
costs.  To limit this exposure, we are in the process of securing back-up
generators and power supplies to our main California facilities.  While the
majority of our production facilities are not located in California, more
extensive power shortages in the state could delay our design and process
research and development as well as increase our operating costs.



Our growth continues to place a significant strain on our
management systems and resources and if we fail to manage our growth, our
ability to market, sell our products or develop new products may he harmed.



Our business is experiencing rapid growth which has
strained our internal systems and will require us to continuously develop
sophisticated information management systems in order to manage the business
effectively.  We are currently implementing a supply-chain management system and
a vendor electronic data interface system.  There is no guarantee that we will
be able to implement these new systems in a timely fashion, that in themselves
they will be adequate to address our expected growth, or that we will be able to
foresee in a timely manner other infrastructure needs before they arise.  Our
success depends on the ability of our executive officers to effectively manage
our growth.  If we are unable to manage our growth effectively, our results of
operations will be harmed.  If we fail to successfully implement new management
information systems, our business may suffer severe inefficiencies that may harm
the results of our operations.

36

---



Risks Related to Our Industry



Our success is dependent on the growth and strength of the
flash memory market.



All of our products, as well as all new products currently
under design, are stand-alone flash memory devices or devices embedded with
flash memory.  A memory technology other than SuperFlash may be adopted as an
industry standard.  Our competitors are generally in a better financial and
marketing position than we are from which to influence industry acceptance of a
particular memory technology.  In particular, a primary source of competition
may come from alternative technologies such as FRAM devices if such technology
is commercialized for higher density applications.  To the extent our
competitors are able to promote a technology other than SuperFlash as an
industry standard, our business will be seriously harmed.



The selling prices for our products are extremely volatile
and have historically declined during periods of over capacity or industry
downturns.



The semiconductor industry has historically been cyclical,
characterized by wide fluctuations in product supply and demand.  From time to
time, the industry has also experienced significant downturns, often in
connection with, or in anticipation of, maturing product cycles and declines in
general economic conditions.  Downturns of this type occurred in 1997 and 1998,
and more recently in late 2000 and 2001.  These downturns are characterized by
diminished product demand, production over-capacity and accelerated decline of
average selling prices, and in some cases have lasted for more than a year.  Our
business could be harmed by industry-wide fluctuations in the future.  The flash
memory products portion of the semiconductor industry, from which we derive
substantially all of our revenues suffered from excess capacity in 1996, 1997
and 1998, which resulted in greater than normal declines in our markets, which
unfavorably impacted our revenues, gross margins and profitability.  While these
conditions improved in 1999 and 2000, deteriorating market conditions at the end
of 2000 and continuing through 2001 have resulted in the decline of our selling
prices and harmed our operating results.



There is seasonality in our business and if we fail to
continue to introduce new products this seasonality may become more
pronounced.



Sales of our products in the consumer electronics
applications market are subject to seasonality.  As a result, sales of these
products are impacted by seasonal purchasing patterns with higher sales
generally occurring in the second half of each year.  In 1999 and the first half
of 2000, this seasonality was partially offset by the introduction of new
products as we continued to diversify our product offerings.  In 2001, this
seasonality again became pronounced as it was combined with deteriorating market
conditions, which together resulted in sequential quarter to quarter declines in
product revenues from the fourth quarter of 2000 through the second quarter of
2001, and lower sales in the second half of 2001.  If we fail to continue to
introduce new products, our business may suffer and the seasonality of a portion
of our sales may become more pronounced.



Item 7A. Quantitative and Qualitative
Disclosures about Market Risk



We are exposed to risks associated with foreign exchange rate
fluctuations due to our international manufacturing and sales activities. These
exposures may change over time as business practices evolve and could negatively
impact our operating results and financial condition. All of our sales are
denominated in U.S. dollars. An increase in the value of the U.S. dollar
relative to foreign currencies could make our products more expensive and
therefore reduce the demand for our products. Such a decline in the demand could
reduce revenues and/or result in operating losses. In addition, a downturn in
the economies of China, Japan or Taiwan could impair the value of our equity
investments in companies with operations in these countries.  If we consider the
value of these companies to be impaired, we will write off, or expense, some or
all of our investments.  In the fourth quarter of 2001, we wrote down our
investment in KYE by $3.3 million to $1.3 million due to an other than temporary
decline in its market value.  In addition, we have equity investments in
companies with operations in China, Japan and Taiwan with recorded values at
December 31, 2001 of approximately $50.0 million, $0.9 million and $16.1 million,
respectively.

37

---



At any time, fluctuations in interest rates could effect
interest earnings on our cash, cash equivalents and short-term investments, any
interest expense owed on the line of credit facility, or the fair value of our
investment portfolio. We believe that the effect, if any, of reasonably possible
near term changes in interest rates on our financial position, results of
operations, and cash flows would not be material. Currently, we do not hedge
these interest rate exposures. As of December 31, 2001, the
carrying value of our marketable securities approximated fair value.  The table
below presents the carrying value and related weighted average interest rates
for our cash, cash equivalents and available-for-sale investments as of December
31, 2001 all of which mature in 2002 (in thousands).

`Carrying    Interest
                                                     Value       Rate
                                                   ---------  -----------
Short-term investments - fixed rate.............. $  71,666          3.7%
Cash and cash equivalents - variable rate........    93,598          1.5%
                                                   ---------
                                                  $ 165,264          2.4%
                                                   =========`





Item 8. Consolidated Financial Statements and
Supplementary Data

The consolidated financial statements, together with the
report thereon of PricewaterhouseCoopers LLP, independent accountants, dated
January 20, 2002, except for Note 4, which is as of February 28, 2002, are
included in a separate section of this Report.

Supplementary Data: Selected Consolidated Quarterly
Data

The following table presents our unaudited
consolidated statements of operations data for each of the eight quarters in the
period ended December 31, 2001. In our opinion, this information has been
presented on the same basis as the audited consolidated financial statements
included in a separate section of this report, and all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts below to present fairly the unaudited quarterly results when read in
conjunction with the audited consolidated financial statements and related
notes. The operating results for any quarter should not be relied upon as
necessarily indicative of results for any future period. We expect our quarterly
operating results to fluctuate in future periods due to a variety of reasons,
including those discussed in "Business Risks".

`Quarter Ended
                                        --------------------------------------------------------------------------------------
                                        Mar. 31,   June 30,   Sept. 30,  Dec. 31,   Mar. 31,   June 30,   Sept. 30,  Dec. 31,
                                          2000       2000       2000       2000       2001       2001       2001       2001
                                        ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------
                                                                (in thousands, except per share data)
Net revenues:
    Product revenues.................. $  61,813  $ 102,076  $ 162,365  $ 149,062  $  79,929  $  52,897  $  65,163  $  60,629
    License revenues..................       501      1,110      1,356     11,978      6,369      9,818      9,034     10,191
                                        ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------
      Total net revenues.............. $  62,314  $ 103,186  $ 163,721  $ 161,040  $  86,298  $  62,715  $  74,197  $  70,820
Gross profit (loss)................... $  25,839  $  46,102  $  73,635  $  80,546  $  28,940  $  24,678  $ (18,042) $  10,293
Income (loss) from operations......... $  10,497  $  27,365  $  49,222  $  50,658  $   5,502  $     437  $ (44,032) $ (15,687)
Net income (loss)..................... $   9,644  $  22,536  $  36,266  $  37,302  $   5,444  $   1,127  $ (26,482) $  (9,085)
Net income (loss) per share-basic..... $    0.13  $    0.25  $    0.41  $    0.41  $    0.06  $    0.01  $   (0.29) $   (0.10)
Net income (loss) per share-diluted... $    0.11  $    0.24  $    0.37  $    0.39  $    0.06  $    0.01  $   (0.29) $   (0.10)`



Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure

Not applicable.

38

---

PART III



Item 10. Directors and Executive Officers of the
Registrant

The information required by this item will be contained
in our definitive Proxy Statement with respect to our Annual Meeting of
Shareholders under the captions "Election of Directors - Nominees," and
"Security Ownership of Certain Beneficial Owners and Management - Compliance
with the Reporting Requirement of Section 16(a)," and is incorporated by
reference into this report. The information relating to our executive officers
and directors is contained in Part I, Item 1 of this report.

Item 11. Executive Compensation

The information required by this item will be contained
in our definitive Proxy Statement with respect to our Annual Meeting of
Shareholders under the caption "Executive Compensation," and is incorporated by
reference into this report.

Item 12. Security Ownership of Certain Beneficial Owners
and Management

The information required by this item will be contained
in our definitive Proxy Statement with respect to our Annual Meeting of
Shareholders under the caption "Security Ownership of Certain Beneficial Owners
and Management," and is incorporated by reference into this report.

Item 13. Certain Relationships and Related
Transactions

The information required by this item will be contained
in our definitive Proxy Statement with respect to our Annual Meeting of
Shareholders under the caption "Certain Transactions," and is incorporated by
reference into this report.  Please also see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Related Party
Transactions."

39

---



PART IV



Item 14. Exhibits, Financial Statement Schedule, and
Reports on Form 8-K.

(a) (1) Consolidated Financial Statements. The index to
the consolidated financial statements is found on page 44
of this Report.

(2) Financial Statement Schedule. Financial statement
schedule Number II is included.

(3) Exhibits. See Exhibit Index in part (c), below.

(b) Reports on Form 8-K. None.

(c) Index to Exhibits.

|Exhibit Number | Description of
Document                                                                                           
|-------------- | ------------------------------------------------------------------------------------------------------------------
|3.1 (1)        | Bylaws of SST.                                                                                                    
|3.2 (2)        | Restated Articles of Incorporation of SST, dated
November 3, 1995.                                                
|3.3 (3)        | Certificate of Amendment of the Restated
Articles of Incorporation of SST, dated June 30, 2000.                   
|3.4 (4)        | Certificate of Designation of Series A Junior
Participating Preferred Stock.                                      
|4.1            | Reference is made to Exhibits 3.1 to 3.4.                                                                         
|4.2 (5)        | Specimen Stock Certificate of SST.                                                                                
|4.3 (6)        | Rights Agreement between SST and American Stock
Transfer and Trust Co., dated May 4, 1999.                        
|4.4 (7)        | Amendment No. 1 to Rights Agreement between SST
and American Stock Transfer and Trust Co., dated October 28, 2000.
|10.1 (8)       | Equity Incentive Plan and related agreements.                                                                     
|10.2 (9)       | Employee Stock Purchase Plan.                                                                                     
|10.3 (10)      | 1995 Non-Employee Director's Stock Option Plan.                                                                   
|10.4 (11)      | Profit Sharing Plan.                                                                                              
|10.5 (12)      | Lease Agreement between SST and Sonora Court
Properties, dated May 4, 1993, as amended.                           
|10.6 (13)      | Lease Agreement between SST and Coast
Properties, dated May 4, 1995, as amended.                                  
|10.7 (14)      | License Agreement between SST and Taiwan
Semiconductor Manufacturing Co., Ltd., dated February 26, 1997.          
|10.8 (15)      | Lease amendment, dated March 4, 1998, between
SST and Sonora Court Properties.                                    
|10.9 (16)      | Lease Amendment, dated March 4, 1998, between
SST and Coast Properties.                                           
|10.10 (17)     | Loan and Security Agreement between SST and
Foothill Capital Corporation, dated September 22, 1998.               
|10.11 (18)     | 0.25 Micron Agreement between SST and Motorola,
Inc., dated May 5, 1999.                                          
|10.12 (19)     | Loan and Security Agreement amendment between
SST and Foothill Capital Corporation, dated September 30, 1999.     
|10.13 (20)     | Second Amendment to Lease, dated September 13,
1999, between SST and Coast Properties.                            
|10.14 (21)     | Lease Agreement between SST and Bhupinder S.
Lehga and Rupinder K. Lehga, dated November 15, 1999.                
|10.15 (22)     | Lease Agreement between SST and The Irvine
Company, dated November 22, 1999.                                      
|10.16          | Amendment Number Three to Loan and Security
Agreement, dated January 20, 2000.                                    
|10.17 (23)     | Sunnyvale Industrials Net Lease Agreement, dated
June 26, 2000.                                                   
|10.18 (24)     | Amendment Number Six to Loan and Security
Agreement, dated February 8, 2001.                                      
|10.19 (25)     | Amendment Number Seven to Loan and Security
Agreement, dated August 6, 2001.                                      
|23.1           | Consent of PricewaterhouseCoopers LLP,
Independent Accountants.                                                   

________

40

---

1. Filed as Exhibit 3.2 to our Registration Statement on Form S-1, as amended,
File No. 33-97802, filed on October 5, 1995, and incorporated by reference
herein.
2. Filed as Exhibit 3.4 to our Registration Statement on Form S-1, as amended,
File No. 33-97802, filed on October 5, 1995, and incorporated by reference
herein.
3. Filed as Exhibit 3.5 to our Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000, filed on August 7, 2000, and incorporated by reference
herein.
4. Filed as Exhibit 99.3 to our Current Report on Form 8-K filed on May 18,
1999, and incorporated by reference herein.
5. Filed as Exhibit 4.2 to our Registration Statement on Form S-1, as amended,
File No. 33-97802, filed on October 5, 1995, and incorporated by reference
herein.
6. Filed as Exhibit 99.2 to our Current Report on Form 8-K filed on May 18,
1999, and incorporated by reference herein.
7. Filed as Exhibit 3.6 to our Annual Report on Form 10-K for the year ended
December 31, 2000, as amended, filed on March 30, 2001, and incorporated by
reference herein.
8. Filed as the like-numbered Exhibit to our Registration Statement on Form S-
1, as amended, File No. 33-97802, filed on October 5, 1995, and incorporated by
reference herein.  Filed as amended as Exhibit 99.1 to our Registration
Statement on Form S-8, File No. 333-70620, filed on October 1, 2001, and
incorporated by reference herein.
9. Filed as Exhibit 10.3 to our Registration Statement on Form S-1, as amended,
File No. 33-97802, filed on October 5, 1995, and incorporated by reference
herein.
10. Filed as Exhibit 10.4 to our Registration Statement on Form S-1, as amended,
File No. 33-97802, filed on October 5, 1995, and incorporated by reference
herein.
11. Filed as Exhibit 10.5 to our Registration Statement on Form S-1, as amended,
File No. 33-97802, filed on October 5, 1995, and incorporated by reference
herein.
12. Filed as Exhibit 10.6 to our Registration Statement on Form S-1, as amended,
File No. 33-97802, filed on October 5, 1995, and incorporated by reference
herein.
13. Filed as Exhibit 10.7 to our Registration Statement on Form S-1, as amended,
File No. 33-97802, filed on October 5, 1995, and incorporated by reference
herein.
14. Filed as Exhibit 10.16 to our Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997, filed on May 15, 1997, and incorporated by reference
herein.
15. Filed as Exhibit 10.17 to our Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, filed on August 14, 1998, and incorporated by reference
herein.
16. Filed as Exhibit 10.18 to our Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, filed on August 14, 1998, and incorporated by reference
herein.
17. Filed as Exhibit 10.19 to our Annual Report on Form 10-K for the year ended
December 31, 1998, filed on March 30, 1999, and incorporated by reference
herein.
18. Filed as Exhibit 10.21 to our Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999, as amended, filed on August 16, 1999, and incorporated by
reference herein.
19. Filed as Exhibit 10.22 to our Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, filed on November 15, 1999, and incorporated by
reference herein.
20. Filed as Exhibit 10.23 to our Annual Report on Form 10-K for the year ended
December 31, 1999, as amended, filed on February 24, 2000, and incorporated by
reference herein.
21. Filed as Exhibit 10.24 to our Annual Report on Form 10-K for the year ended
December 31, 1999, as amended, filed on February 24, 2000, and incorporated by
reference herein.
22. Filed as Exhibit 10.25 to our Annual Report on Form 10-K for the year ended
December 31, 1999, as amended, filed on February 24, 2000, and incorporated by
reference herein.
23. Filed as Exhibit 10.28 to our Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000, filed on August 7, 2000, and incorporated by reference
herein.
24. Filed as Exhibit 10.31 to our Annual Report on Form 10-K for the year ended
December 31, 2000, as amended, filed on March 30, 2001, and incorporated by
reference herein.
25. Filed as Exhibit 10.32 to our Quarterly Report on Form 10-Q for the quarter
ended September 30, 2001, as amended, filed on November 13, 2001, and
incorporated by reference herein.

42

---



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Sunnyvale, County of Santa Clara, State of California, on the 29th day
of March, 2002.

| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | SILICON STORAGE TECHNOLOGY, INC.
By: /s/ BING YEH 
Bing Yeh
President and Chief Executive Officer
(Principle Executive Officer)

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.



|Signature                               | Title                                                                                                                       | Date          
|--------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | --------------
|/s/ BING YEH
Bing Yeh                   | President, Chief Executive Officer and Director (Principal
Executive Officer)                                               | March 29, 2002
|/s/ JEFFREY L. GARON
Jeffrey L. Garon   | Vice President Finance & Administration, Chief Financial
Officer and Secretary (Principal Financial and Accounting Officer) | March 29, 2002
|/s/ YAW WEN HU
Yaw Wen Hu               | Senior Vice President, Operations and Process Development and
Director                                                      | March 29, 2002
|/s/ TSUYOSHI TAIRA
Tsuyoshi Taira       | Director                                                                                                                    | March 29, 2002
|/s/ RONALD CHWANG
Ronald Chwang         | Director                                                                                                                    | March 29, 2002
|/s/ YASUSHI CHIKAGAMI
Yasushi Chikagami | Director                                                                                                                    | March 29, 2002

43

---

SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|Item                                                                            | Page
|------------------------------------------------------------------------------- | ----
|Report of Independent Accountants                                               | 45  
|Consolidated Balance Sheets                                                     | 46  
|Consolidated Statements of Operations                                           | 47  
|Consolidated Statements of Shareholders' Equity
and Comprehensive Income (Loss) | 48  
|Consolidated Statements of Cash Flows                                           | 49  
|Notes to Consolidated Financial Statements                                      | 50  
|Schedule II                                                                     | 70  

44

---

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
Silicon Storage Technology, Inc.



In our opinion, the consolidated statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Silicon Storage Technology, Inc. and its Subsidiaries at December
31, 2001 and 2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Jose, California
January 20, 2002, except for Note 4,
which is as of February 28, 2002.

45

---

SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                 (in thousands)

`December 31,
                                                                      --------------------
                                                                        2000       2001
                                                                      ---------  ---------
                               ASSETS
Current assets:
    Cash and cash equivalents....................................... $ 109,086  $  93,598
    Short-term available-for-sale investments.......................   139,963     71,666
    Trade accounts receivable-unrelated parties, net of allowance
      for doubtful accounts of $783 in 2000 and $2,814 in 2001......   106,258     19,874
    Trade accounts receivable-related parties.......................    20,000     20,796
    Inventories.....................................................    73,290    108,224
    Deferred tax asset..............................................     9,491     24,115
    Other current assets............................................    14,835     11,839
                                                                      ---------  ---------
       Total current assets.........................................   472,923    350,112
Equipment, furniture and fixtures, net..............................    16,874     22,006
Equity investments..................................................    19,369     67,007
Long-term available-for-sale investments............................        --      1,299
Deferred tax asset..................................................        --      5,239
Other assets........................................................     3,424      1,097
                                                                      ---------  ---------
           Total assets............................................. $ 512,590  $ 446,760
                                                                      =========  =========

                            LIABILITIES
Current liabilities:
    Notes payable, current portion.................................. $      --  $     316
    Trade accounts payable-unrelated parties........................    39,184     24,098
    Trade accounts payable-related parties..........................     7,339      7,253
    Accrued expenses and other liabilities..........................    33,879     16,390
    Deferred revenue................................................    15,274      5,499
                                                                      ---------  ---------
       Total current liabilities....................................    95,676     53,556
Other liabilities...................................................       279      1,793
                                                                      ---------  ---------
       Total liabilities............................................    95,955     55,349
                                                                      ---------  ---------
Commitments (Note 5) and Contingencies (Note 6).

                        SHAREHOLDERS' EQUITY
Preferred Stock, no par value
    Authorized: 7,000 shares
    Series A Junior Participating Preferred Stock, no par value
    Designated: 450 shares
    Issued and outstanding: none....................................        --         --
Common stock, no par value:
    Authorized: 250,000 shares
    Issued and outstanding: 90,118 shares in 2000
    and 91,585 shares in 2001.......................................   330,310    333,989
Accumulated other comprehensive income..............................       132        225
Retained earnings...................................................    86,193     57,197
                                                                      ---------  ---------
       Total shareholders' equity...................................   416,635    391,411
                                                                      ---------  ---------
           Total liabilities and shareholders' equity............... $ 512,590  $ 446,760
                                                                      =========  =========`

The accompanying notes are an integral part of these consolidated
                             financial statements.

46

---

SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)

`Year Ended December 31,
                                                                 -------------------------------
                                                                   1999       2000       2001
                                                                 ---------  ---------  ---------
Net revenues:
    Product revenues - unrelated parties....................... $  99,769  $ 408,708  $ 168,593
    Product revenues - related parties.........................    18,473     66,608     90,025
    License revenues...........................................     6,552     14,945     35,412
                                                                 ---------  ---------  ---------
         Total net revenues....................................   124,794    490,261    294,030
Cost of revenues...............................................    94,652    264,139    248,161
                                                                 ---------  ---------  ---------
Gross profit...................................................    30,142    226,122     45,869
                                                                 ---------  ---------  ---------
Operating expenses:
    Research and development...................................    18,199     41,535     50,380
    Sales and marketing........................................    10,576     27,968     26,794
    General and administrative.................................     3,800     14,966     17,855
    Other......................................................     2,011      3,911      4,620
                                                                 ---------  ---------  ---------
         Total operating expenses..............................    34,586     88,380     99,649
                                                                 ---------  ---------  ---------
Income (loss) from operations..................................    (4,444)   137,742    (53,780)
Interest and other income......................................       730     10,510      7,350
Interest expense...............................................      (214)      (691)      (338)
                                                                 ---------  ---------  ---------
Income (loss) before provision for (benefit from) income taxes.    (3,928)   147,561    (46,768)
Provision for (benefit from) income taxes......................        88     41,813    (17,772)
                                                                 ---------  ---------  ---------
         Net income (loss)..................................... $  (4,016) $ 105,748  $ (28,996)
                                                                 =========  =========  =========

Net income (loss) per share - basic............................ $   (0.06) $    1.23  $   (0.32)
                                                                 =========  =========  =========

Net income (loss) per share - diluted.......................... $   (0.06) $    1.13  $   (0.32)
                                                                 =========  =========  =========`

The accompanying notes are an integral part of these consolidated
                             financial statements.

47

---

SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)

                                 (in thousands)

`Retained     Accumulated
                                       Common Stock       Deferred      Earnings        Other
                                   --------------------     Stock     (Accumulated  Comprehensive
                                    Shares     Amount    Compensation   Deficit)        Income        Total
                                   ---------  ---------  -----------  ------------  --------------  ---------
Balances, December 31, 1998.......   69,258  $  53,601  $       (32) $    (15,539) $           --  $  38,030
    Issuance of shares for
       acquisition of Linvex
       Technology Corporation.....    2,685      5,146           --            --              --      5,146
    Issuance of shares of
       common stock under
       employees' stock
       purchase and
       option plans...............    2,895      1,823           --            --              --      1,823
    Amortization of deferred
       stock ompensation..........       --         --           32            --              --         32
    Net loss and comprehensive
       loss.......................       --         --           --        (4,016)             --     (4,016)
                                   ---------  ---------  -----------  ------------  --------------  ---------
Balances, December 31, 1999.......   74,838     60,570           --       (19,555)             --     41,015
    Issuance of shares of common
       stock upon secondary
       offering and private
       placement, net of offering
       costs of $1,099............   12,579    253,729           --            --              --    253,729
    Issuance of shares of
       common stock under
       employees' stock
       purchase and
       option plans...............    2,701      3,782           --            --              --      3,782
    Tax benefit from exercise
       of stock options...........       --     12,229           --            --              --     12,229
    Net income....................       --         --           --       105,748              --
    Unrealized gain on
       available for sale
       securities, net of tax.....       --         --           --            --             132
    Comprehensive income..........       --         --           --            --              --    105,880
                                   ---------  ---------  -----------  ------------  --------------  ---------
Balances, December 31, 2000.......   90,118    330,310           --        86,193             132    416,635
    Issuance of shares of
       common stock under
       employees' stock
       purchase and
       option plans...............    1,467      3,679           --            --              --      3,679
    Net loss......................       --         --           --       (28,996)             --
    Unrealized gain on
       available for sale
       securities, net of tax.....       --         --           --            --              93
    Comprehensive loss............       --         --           --            --              --    (28,903)
                                   ---------  ---------  -----------  ------------  --------------  ---------
Balances, December 31, 2001.......   91,585  $ 333,989  $        --  $     57,197  $          225  $ 391,411
                                   =========  =========  ===========  ============  ==============  =========`

The accompanying notes are an integral part of these consolidated
                             financial statements.

48

---

SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

`Year Ended December 31,
                                                                    -------------------------------
                                                                      1999       2000       2001
                                                                    ---------  ---------  ---------
Cash flows from operating activities:
      Net income (loss)........................................... $  (4,016) $ 105,748  $ (28,996)
      Adjustments to reconcile net income (loss) to net cash
         provided by (used in) operating activities:
      Depreciation and amortization...............................     4,613      6,218      9,799
      Provision for doubtful accounts receivable..................        32        477      2,251
      Provision for sales returns.................................       144      8,166     32,227
      Provision for excess and obsolete inventories
         and write down of inventory to market....................     3,293      4,261     73,932
      Amortization of deferred stock compensation.................        32         --         --
      (Gain) loss on sale of equipment............................         3        (62)        72
      Deferred income taxes.......................................        --     (8,994)   (19,863)
      Purchased in-process research and development...............     2,011      3,911         --
      Other operating expenses....................................        --         --      4,620
      Tax benefit from employee stock plans.......................        --     12,229         --
      Changes in operating assets and liabilities:
           (in 1999 and 2000, net of effects of acquisitions)
           Accounts receivable from unrelated parties.............   (23,889)   (81,616)    55,109
           Accounts receivable from related parties...............    (2,735)   (14,427)    (3,999)
           Inventories............................................   (24,662)   (47,785)  (108,866)
           Other current and noncurrent assets....................      (321)   (11,646)     3,355
           Trade accounts payable to unrelated parties............     8,385     19,977    (15,086)
           Trade accounts payable to related parties..............        --      7,339        (86)
           Accrued expenses and other liabilities.................      (881)    28,538    (17,226)
           Deferred revenue.......................................     2,205     11,130     (9,775)
                                                                    ---------  ---------  ---------
            Net cash provided by (used in) operating activities...   (35,786)    43,464    (22,532)
                                                                    ---------  ---------  ---------
Cash flows from investing activities:
      Restricted cash.............................................        --         --     12,490
      Repayment of restricted cash................................        --         --    (12,490)
      Acquisition of equipment, furniture and fixtures............    (7,928)   (10,745)   (13,625)
      Proceeds from sale of equipment.............................        --         62         --
      Purchases of available-for-sale investments.................        --   (147,550)  (166,538)
      Sales and maturities of available-for-sale investments......       851      7,719    234,928
      Investment in equity securities.............................        --    (18,429)   (52,211)
      Cash acquired (used in) in acquisition......................       110     (4,154)      (498)
                                                                    ---------  ---------  ---------
            Net cash provided by (used in) investing activities...    (6,967)  (173,097)     2,056
                                                                    ---------  ---------  ---------
Cash flows from financing activities:
      Borrowings..................................................    42,150     39,750      1,800
      Repayments..................................................   (22,863)   (59,674)      (261)
      Issuance of shares of common stock..........................     1,823    257,511      3,679
      Other.......................................................      (141)       (91)      (230)
                                                                    ---------  ---------  ---------
            Net cash provided by financing activities.............    20,969    237,496      4,988
                                                                    ---------  ---------  ---------
Net increase (decrease) in cash and cash equivalents..............   (21,784)   107,863    (15,488)
Cash and cash equivalents at beginning of year....................    23,007      1,223    109,086
                                                                    ---------  ---------  ---------
Cash and cash equivalents at end of year.......................... $   1,223  $ 109,086  $  93,598
                                                                    =========  =========  =========
Supplemental disclosure of cash flow information:
Cash received for interest........................................ $      --  $   3,844  $   8,760
Cash paid for interest............................................ $     213  $     691  $     356
Net cash paid (received) for income taxes......................... $  (1,652) $  24,513  $  12,965
Common stock issued in relation to the acquisition of Linvex...... $   5,146  $      --  $      --
Write-off of fully depreciated equipment, furniture and fixtures.. $  11,847  $      --  $      --`

The accompanying notes are an integral part of these consolidated
                             financial statements.

49

---

SILICON STORAGE TECHNOLOGY, INC. AND
SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



1. Nature of Operations and Summary of Significant Accounting
Policies:

Nature of Operations:

Silicon Storage Technology, Inc. ("SST" or "us" or
"we") supplies flash memory semiconductor devices for digital consumer,
networking, wireless communications and Internet computing markets. Flash memory
is nonvolatile memory that does not lose data when the power source is removed
and is capable of electronically erasing selected blocks of data. We license our
SuperFlash technology to other companies for non-competing applications. Our
products are used in personal computers, personal computer peripheral devices,
consumer electronics and communications devices. Our products are sold to
manufacturers located primarily in Asia.

Use of Estimates in Preparation of the Financial
Statements:

The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

Risks, Uncertainties and Concentrations:

Our sales are concentrated in the nonvolatile memory
class of the semiconductor memory industry, which is highly competitive and
rapidly changing. Significant technological changes in the industry, changes in
customer requirements, changes in product costs and selling prices, or the
emergence of competitor products with new capabilities or technologies could
affect our operating results adversely. We currently buy all wafers and die, an
integral component of our products, from outside suppliers and we are dependent
on third party subcontractors to assemble and test our products. Failure by
these suppliers to satisfy our requirements on a timely basis at competitive
prices could cause us to suffer manufacturing delays, a possible loss of
revenues, or higher than anticipated costs of revenues any of which could
severely adversely affect operating results.

Since March 2001, we have been out-sourcing our end customer
service logistics in Taiwan to Silicon Professional Technology Ltd., or SPT.
SPT is a wholly-owned subsidiary of one of our stocking representatives in
Taiwan, Professional Computer Technology Limited, or PCT, and provides planning,
warehousing, delivery, billing, collection and other logistic functions for us
in Taiwan.  SPT now services substantially all of our customers based in Taiwan
and selected customers throughout Asia.  Products shipped to SPT are accounted
for as consigned inventory, and revenue is recognized when the products have
been sold to end customers by SPT.  For the year ended December 31, 2001, SPT
and PCT serviced customer sales that accounted for 30.3% and 2.1% of our net
product revenues recognized. Further description of our relationships with PCT
and SPT is in Note 12 of these Notes to the Consolidated Financial Statements.

We ship products to, and have accounts receivable from,
original equipment manufacturers, or OEMs, original design manufacturers, or
ODMs, contract electronic manufacturers, or CEMs, stocking representatives,
domestic distributors, and our logistics center.   Our stocking representatives,
domestic distributors and logistics center reship our products to our end
customers, including OEMs, ODMs, CEMs and end users. In 1999, Actron Technology
Co., Ltd., or Actron, a stocking representative, represented 12.4% of our net
product revenues.  No stocking representative or domestic distributor serviced
more than 10.0% of our customer sales in 2000 or 2001. Our stocking
representatives, distributors and logistics center could discontinue their
relationship with us or discontinue selling our products at any time. The loss
of our relationship with any of our stocking representatives, distributors or
our logistics center could harm our operating results by impairing our ability
to sell our products to our end customers.

We derived 80.8%, 77.6% and 80.7% of our net product revenues
from Asia during 1999, 2000 and 2001, respectively.  Additionally, substantially
all of our wafer suppliers and packaging and testing subcontractors are located
in Asia.  Any kind of economic, political or environmental instability in this
region of the world can have a severe negative impact on our operating results
due to the large concentration of our production and sales activities in this
region.

50

---

It should be noted that we may be greatly impacted by the
political, economic and military conditions in Taiwan. Taiwan and China are
continuously engaged in political disputes and both countries continue to
conduct military exercises in or near the other's territorial waters and
airspace. Such disputes may continue and even escalate, resulting in an economic
embargo, a disruption in shipping or even military hostilities. This could
severely harm our business by interrupting or delaying production or shipment of
our product. Any kind of activity of this nature or even rumors of such activity
could severely and negatively impact our operations, revenues, operating
results, and stock price.

Our corporate headquarters are located in California near
major earthquake faults. In addition, some of our suppliers are located near
fault lines. In the event of a major earthquake or other natural disaster near
our headquarters, our operations could be harmed. Similarly, a major earthquake
or other natural disaster, such as a typhoon, near one or more of our major
suppliers, like the earthquake in September 1999 or the typhoon in September
2001 that occurred in Taiwan, could potentially disrupt the operations of those
suppliers, which could then limit the supply of our products and harm our
business.

Basis of Consolidation:

The consolidated financial statements include the
accounts of SST and our wholly-owned subsidiaries after elimination of
inter-company balances and transactions. The functional currency of SST and its
subsidiaries is the United States dollar.

Foreign Currency Transactions:

Monetary accounts maintained in currencies other than
the United States dollar are re-measured using the foreign exchange rate at the
balance sheet date.  Operations accounts and non-monetary balance sheet accounts
are measured and recorded at the rate reported in current operations.  The
effect of foreign currency re-measurement was not significant in fiscal years
1999, 2000 or 2001.

Financial Instruments:

Cash equivalents are highly liquid investments with
original or remaining maturities of three months or less as of the dates of
purchase. Highly liquid investments included in cash equivalents are classified
as available for sale and are carried at cost, which approximates fair value.
Cash equivalents present insignificant risk of changes in value because of
interest rate changes.  We maintain substantially all of our cash balances with
three major financial and/or brokerage institutions domiciled in the United
States and we have not experienced any material losses relating to these
investment instruments.

Short-term investments, which are comprised of federal, state
and municipal government obligations and foreign and public corporate debt
securities, are classified as available-for-sale and carried at fair value,
based on quoted market prices, with the unrealized gains or losses, net of tax,
reported in shareholders' equity as other comprehensive income.  The cost of
debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity, both of which are included in interest income.  Realized
gains and losses are recorded on the specific identification method.  Realized
gains and losses were not material in 1999, 2000, and 2001.

The carrying amounts reported for cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses are considered to
approximate fair values based upon the short maturities of those financial
instruments. The carrying amount of borrowing under the line of credit is also
considered to approximate fair value as the interest rate on the borrowing
adjusts to the bank's reference rate.  The fair value of marketable securities
is in Note 2 of these Notes to the Consolidated Financial Statements.

Financial instruments that potentially subject us to
concentrations of credit risks comprise, principally, cash, cash equivalents,
investments and trade accounts receivable. We invest our excess cash in
accordance with our investment policy, which has been approved by our Board of
Directors and reviewed periodically. We perform credit evaluations of new
customers and require those without positive, established histories to pay in
advance, upon delivery or through letters of credit. Otherwise, we do not
require collateral of our customers, and maintain allowances for potential
credit losses which have historically not been material. As of December 31,
2000, no customer exceeded 10% of our accounts receivable.  One account, SPT, a
related party, refer to Note 12 of these Notes to the Consolidated Financial
Statements, represented 48.8% and another customer, Actron, represented 21.9% of
our accounts receivable as of December 31, 2001.

51

---

We have acquired interests in Japanese and Taiwanese
companies and a Cayman Islands company operating in China (see Note 12 of these
Notes to the Consolidated Financial Statements). As these companies are
privately held, it was not practicable to estimate the fair value of the
investments in the issued untraded common stock. Investments in privately held
companies are included in "Equity investments" in the balance sheet and are
carried at their original cost and when a decline in value is other than
temporary the securities are reduced to their estimated fair value. An
investment in King Yuan Electronics Company, Limited, or KYE, a Taiwanese
company that completed an initial public offering during 2001, has been included
in "Long-term available-for-sale investments," and we have recorded the
investment at fair market value, with unrealized gains and losses reported as a
separate component of shareholders' equity.  If a loss is other than temporary,
it is reported as an "Other operating expense." Dividends and other
distributions of earnings from the investees, if any, are included in other
income when declared.

Inventories:

Inventories are stated at the lower of cost
(determined on a first-in, first-out basis) or market value. We typically plan
our production and inventory levels based on internal forecasts of customer
demand, which are highly unpredictable and can fluctuate substantially. The
value of our inventory is dependent on our estimate of future average selling
prices, and, if our projected average selling prices are over estimated, we may
be required to adjust our inventory value to reflect the lower of cost or
market. Due to the large number of units in our inventory, even a small change
in average selling prices could result in a significant adjustment and have a
significant impact on our financial position and results of operations.  Our
inventories include high technology parts and components that are specialized in
nature or subject to rapid technological obsolescence. While we have programs to
minimize the required inventories on hand and we consider technological
obsolescence when estimating allowances for potentially excess and obsolete
inventories and those required to reduce recorded amounts to market values, it
is reasonably possible that such estimates could change in the near term. Such
changes in estimate could have a significant impact on our financial position
and results of operations.

Inventory valuation adjustment to cost of sales amounted to
$3.3 million in 1999, $4.3 million in 2000 and  $72.2 million in 2001.  In 2001,
$24.5 million of the adjustment related to lower of cost or market with the
balance due to excess or obsolete inventory.

Equipment, Furniture and Fixtures:

Equipment, furniture and fixtures are stated at cost
and depreciated using the straight-line method over estimated useful lives of
three to seven years (see Note 3 of these Notes to these Consolidated Financial
Statements).

Intangible Assets:

Intangible assets include technology acquired in
acquisitions and technology acquired under licensing arrangements. These amounts
are included in other assets and amortized over estimated lives of three years
to five years.

Long-Lived Assets:

Long-lived assets include equipment, furniture and
fixtures, privately held equity investments and intangible assets. Whenever
events or changes in circumstances indicate that the carrying amounts of
long-lived assets may not be recoverable, we estimate the future cash flows,
undiscounted and without interest charges, expected to result from the use of
those assets and their eventual cash position. If the sum of the expected future
cash flows is less then the carrying amount of those assets, we recognize an
impairment loss based on the excess of the carrying amount over the fair value
of the assets.

52

---

Warranties:

Our products are generally subject to warranty and we
provide for the estimated future costs of repair, replacement or customer
accommodation upon shipment of the product in the accompanying statements of
operations.

Revenue Recognition:

Sales to direct customers and foreign stocking
representatives are recognized upon shipment of product net of an allowance for
estimated returns. When product is shipped to direct customers or stocking
representatives, or by our distributors or SPT to end users, prior to
recognizing revenue, we also require evidence of the arrangement, the price is
fixed or determinable and collection is reasonably assured. Sales to
distributors are made primarily under arrangements allowing price protection and
the right of stock rotation on merchandise unsold. Because of the uncertainty
associated with pricing concessions and future returns, we defer recognition of
such revenues, related costs of revenues and related gross profit until the
merchandise is sold by the distributor. Product shipped to SPT is accounted for
as consigned inventory and revenue is recognized when the product has been sold
by SPT.

For license and other arrangements for technology that we are
continuing to enhance and refine and under which we are obligated to provide
unspecified enhancements, revenue is recognized over the lesser of the estimated
period that we have historically enhanced and developed refinements to the
technology, approximately one to two years (the upgrade period), or the
remaining portion of the upgrade period from the date of delivery, provided all
specified technology and documentation has been delivered, the fee is fixed or
determinable and collection of the fee is reasonably assured. From time to time,
we reexamine the estimated upgrade period relating to licensed technology to
determine if a change in the estimated upgrade period is needed. Revenue from
license or other technology arrangements where we are not continuing to enhance
and refine technology or are not obligated to provide unspecified enhancements
is recognized upon delivery, if the fee is fixed or determinable and collection
of the fee is reasonably assured.

Royalties received under these arrangements during the
upgrade period are recognized as revenue based on the ratio of the elapsed
portion of the upgrade period to the estimated upgrade period. The remaining
portions of the royalties are recognized ratably over the remaining portion of
the upgrade period. Royalties received after the upgrade period has elapsed are
recognized when reported to us, which generally coincides with the receipt of
payment.

Research and Development:

Research and development expenses are charged to
operations as incurred.

Income Taxes:

Deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.

Computation of Net Income (Loss) Per Share:

We have computed and presented net income (loss) per
share under two methods, basic and diluted. Basic net income (loss) per share is
computed by dividing net income (loss) by the weighted average number of common
shares outstanding for the period. Diluted net income (loss) per share is
computed by dividing net income (loss) by the sum of the weighted average number
of common shares outstanding and potential common shares (when dilutive).

Stock Compensation:

We account for stock-based compensation using the
intrinsic value method. We calculate the fair value of stock-based compensation
and disclose the pro forma impact of the value on net income (loss) and net
income (loss) per share in Note 7 of these Notes to the Consolidated Financial
Statements.

53

---

Comprehensive Income (Loss):

Comprehensive income (loss) is defined as the change
in equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources.  Comprehensive income (loss)
includes unrealized gains and losses on marketable securities, net of tax. Other
comprehensive gain (loss) is presented in the statement of shareholders' equity
and comprehensive income (loss).

Recent Accounting Pronouncements:

In June 1998, the Financial Accounting Standards
Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No.
133, "Accounting for Derivatives and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133," which deferred the effective date until the first
fiscal year beginning after June 15, 2000. In June 2000, the FASB issued SFAS
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an Amendment of SFAS 133." SFAS No. 138 amends certain terms
and conditions of SFAS 133. SFAS 133 requires that all derivative instruments be
recognized at fair value as either assets or liabilities in the statement of
financial position. The accounting for changes in the fair value (i.e., gains or
losses) of a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and further, on the type of hedging
relationship. We adopted SFAS No. 133, as amended, in our quarter ending March
31, 2001.  We do not hold and have not held any derivative instruments, and
accordingly, the adoption of SFAS No. 133 did not have a material impact on our
financial statements.

In July 2001, the FASB issued SFAS No. 141, "Business
Combinations." SFAS No. 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. We believe the adoption of SFAS No. 141 to date has not had
a significant impact on our financial statements.

In July 2001, the FASB issued SFAS No. 142, "Goodwill
and Other Intangible Assets," which is effective for fiscal years beginning
after December 15, 2001. SFAS No. 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the standard includes
provisions upon adoption for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the testing for impairment of existing goodwill and other
intangibles.  We believe the adoption of SFAS No. 142 will not have a
significant impact on our financial position and results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of."  SFAS No. 144 applies to all long-lived assets
(including discontinued operations) and consequently amends Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Division of a Business."  SFAS No. 144
develops one accounting model for long-lived assets that are to be disposed of
by sale and requires the measurement to be at the lower of book value or fair
value less cost to sell.  Additionally, SFAS No. 144 expands the scope of
discontinued operations to include all components of an entity with operations
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We
believe the adoption of SFAS No. 144 will not have a significant impact on our
financial statements.

54

---



2. Marketable Securities:

The fair value of marketable securities as of December
31, 2001 were as follows (in thousands):

`Amortized  Unrealized     Fair
                                                     Cost        Gain        Value
                                                   ---------  -----------  ---------
Corporate bonds and notes........................ $  56,988  $        59  $  57,047
Foreign bonds and notes..........................     5,418           49      5,467
Foreign listed equity securities.................     1,299           --      1,299
Government bonds and notes.......................    58,944          255     59,199
                                                   ---------  -----------  ---------
Total bonds and notes............................ $ 122,649  $       363    123,012
                                                   =========  ===========
Less amounts classified as cash equivalents..............................   (50,047)
                                                                           ---------
     Total short and long-term marketable securities..................... $  72,965
                                                                           =========

Contractual maturity dates for investments in bonds and notes:
     Less than 1 year.................................................... $  71,666
                                                                           =========`

The unrealized gain as of December 31, 2001 is recorded in
accumulated other comprehensive income, net of tax of $138,000.

The fair value of marketable securities as of December 31,
2000 were as follows (in thousands):

`Unrealized
                                                   Amortized     Gain        Fair
                                                     Cost       (Loss)       Value
                                                   ---------  -----------  ---------
Corporate bonds and notes........................ $  69,155  $       (20) $  69,135
Government bonds and notes.......................   141,523          152    141,675
                                                   ---------  -----------  ---------
Total bonds and notes............................ $ 210,678  $       132    210,810
                                                   =========  ===========
Less amounts classified as cash equivalents..............................   (70,847)
                                                                           ---------
     Total short-term marketable securities.............................. $ 139,963
                                                                           =========`

At December 31, 2000 the contractual maturity for all
investments was less than one year.  Available-for-sale securities are carried
at fair value.  Gross unrealized gains of approximately $152,000 were netted
against gross unrealized losses of approximately $20,000.

3. Balance Sheet Detail (in thousands):

Inventories comprise:

`December 31,
                                                   ----------------------
                                                     2000        2001
                                                   ---------  -----------
Raw materials.................................... $  29,025  $    65,518
Work in process..................................    17,631        4,971
Finished goods...................................    26,634       33,968
Consigned inventory..............................        --        3,767
                                                   ---------  -----------
                                                  $  73,290  $   108,224
                                                   =========  ===========`

55

---

Equipment, furniture and fixtures comprise:

`December 31,        Estimated
                                                   ----------------------   Useful
                                                     2000        2001        Lives
                                                   ---------  -----------  ---------
Equipment........................................ $  13,389  $    14,998   Four years
Design hardware..................................     4,234        6,939   Three years
Software.........................................     5,781        7,334   Three years
Furniture and fixtures...........................     2,269        9,951   Seven years
                                                   ---------  -----------
                                                     25,673       39,222
Less accumulated depreciation....................     9,906       17,790
                                                   ---------  -----------
                                                     15,767       21,432
Construction in progress.........................     1,107          574
                                                   ---------  -----------
                                                  $  16,874  $    22,006
                                                   =========  ===========`

Depreciation expense was $3,676,000, $5,016,000 and
$8,436,000 for 1999, 2000 and 2001, respectively. Construction in progress in
2000 relates primarily to software and consulting costs incurred to implement
our data-warehouse and our supply chain management system and in 2001 relates
primarily to our supply chain management system. These costs will be depreciated
over three years beginning during the month that each system is fully
functional. The data-warehouse was functional by the end of 2001, and we expect
the supply chain management system to be functional by the end of 2002.  The
estimated useful life of software purchased after December 31, 1999 is three
years (as compared to the four year life previously used) to more accurately
reflect our actual replacement rate of software.

Accrued liabilities comprise:

`December 31,
                                                   ----------------------
                                                     2000        2001
                                                   ---------  -----------
Accrued compensation and related................. $  14,509  $     4,372
Accrued income tax payable.......................    11,292          434
Accrued liabilities-related parties..............       356          764
Accrued warranty.................................       357        2,883
Other accrued liabilities........................     7,365        7,937
                                                   ---------  -----------
                                                  $  33,879  $    16,390
                                                   =========  ===========`

4. Line of Credit:

As of December 31, 2001 we had no borrowing on our line
of credit of up to $35.0 million. Under the agreement, our borrowing is limited
to 80.0% of eligible world-wide accounts receivable, and is also reduced by any
letters of credit issued under our line of credit.  As of December 31, 2001,
there was approximately $3.6 million outstanding in letters of credit and $2.3
million available under this line. The line bears interest at a rate of the
bank's reference rate plus 0.5% (6.0% at December 31, 2001), with a minimum
interest rate of 6.0%. Under the agreement, we are required to comply with
certain covenants including maintaining a specified level of tangible net worth
and we are not permitted to pay a dividend.  While we maintained the specified
level of tangible net worth, we were in default of certain other covenants and
reporting obligations. On February 28, 2002 the lender granted a waiver of these
defaults and has also waived future compliance with certain covenants and
reporting obligations, subject to certain conditions, through the maturity of
the line of credit in September 2002.  We must pay an unused line fee at the
annual rate of one quarter of one percent on the unused portion.

5. Commitments:

We lease our corporate facilities under non-cancelable
operating leases that expire in 2002, 2005 and 2010. The leases require
escalating monthly payments over their terms and, therefore, periodic rent
expense is being recognized on a straight-line basis. Under the terms of the
leases, we are responsible for maintenance costs, including real property taxes,
utilities and other costs. Rent expense was $1,107,000, $2,060,000 and
$5,334,000 in 1999, 2000 and 2001, respectively.

56

---

Future minimum rental payments at December 31, 2001 are as
follows (in thousands):

`2002............................................. $   4,869
2003.............................................     4,980
2004.............................................     5,131
2005.............................................     3,563
2006.............................................     2,434
Thereafter.......................................     8,471
                                                   ---------
                                                  $  29,448
                                                   =========`

Purchase Commitments:

In December 2000, we committed, subject to certain
business conditions, to prepay $50.0 million to a vendor in 2001 to secure
increased wafer capacity in 2002 and 2003.  In the second quarter of 2001, in
response to weakening product demand and economic conditions, we renegotiated
the commitment to defer the payment to 2002.  As of December 31, 2001, we had
prepaid a total of $5.0 million towards this commitment, which is included in
other current assets on the balance sheet.  In addition, we had outstanding
purchase commitments with our foundry vendors of approximately $10.3 million for
delivery in 2002.

6. Contingencies:

On January 3, 1996, Atmel Corporation sued us in the U.S.
District Court for the Northern District of California. Atmel's complaint
alleged that we willfully infringe five U.S. patents owned by or exclusively
licensed to Atmel. Atmel later amended its complaint to allege infringement of a
sixth patent. Regarding each of these six patents, Atmel sought a judgment that
we infringe the patent, an injunction prohibiting future infringement, and
treble damages, as well as attorney's fees and expenses.

On two of the six patents, the District Court ruled by
summary judgment that we did not infringe. Two of the other patents were
invalidated by another U.S. District Court in a proceeding to which we were not
a party, but this decision was later reversed by the Federal Circuit Court of
Appeals.  At this point, three patents remain at issue in Atmel's District Court
case against us: the '811, the '829 and the '903.

On February 17, 1997, Atmel filed an action with the
International Trade Commission, or ITC, against two suppliers of our parts,
involving four of the six patents that Atmel alleged that we infringed in the
District Court case above. We intervened as a party to that investigation.
Pursuant to indemnification agreements with these suppliers, we were obligated
to indemnify both to the extent provided in those agreements. As more fully
described below, the settlement with Winbond terminated our indemnity
obligations to that company.

As to one of these four patents, Atmel's claims were
withdrawn because of the summary judgment granted by the District Court, as
described above. On October 16, 2000, the ITC found U.S. Patent No. 4,451,903
("the '903 patent") valid and infringed, and ruled that we could not import
into the United States certain products that use the claimed circuit made by one
of our suppliers. The ITC also ruled that we do not infringe the two other
patents at issue ("the '811 and '829 patents"). We appealed from the
Limited Exclusion Order, and in August, 2001 the Court of Appeals for the
Federal Circuit issued an opinion giving its reasons for denying that appeal.
The '903 patent and the ITC's Limited Exclusion Order expired on September 14,
2001.

In the District Court case, in April 2001, Atmel filed
motions for summary judgment on the '811 and '829 patents as well as the '903
patent.  On May 11, 2001 we filed our opposition papers with the court and filed
motions for summary judgment that the '903 patent is invalid.  The trial court
denied Atmel's motion for summary judgment and our motion for summary judgment.
After the decision of the Federal Circuit was rendered, we re-noticed our motion
for summary judgment that the '903 patent was invalid. We also filed two motions
for sanctions for alleged discovery abuse. The trial court granted one of our
sanctions motions and denied the other. Our motion for summary judgment to
invalidate the '903 patent has been submitted and no decision has been reached.
Atmel has filed a counter motion for summary judgment that the '903 patent is
valid. We anticipate that the court will issue a ruling on both motions before
trial. On January 14, 2002 the court in Atmel Corp. v. Macronix America,
Inc. (N.D. Cal. C97-02920 DLJ) denied Atmel's motion to correct another one
of the patents Atmel has asserted against us ("the '747 patent").  We intervened
as a party in the Macronix case for purposes of opposing that motion.  As a
result of that decision, Atmel has publicly stated that it will withdraw its
claims against us based on the '747 patent. The trial court has scheduled a
trial date on all issues to begin on April 8, 2002.

57

---

On October 1, 2000, we announced a settlement in our lawsuit
with Winbond Electronics of Taiwan. We filed a lawsuit against Winbond in July
1998 in the U.S. District Court in San Jose, California pursuant to the
termination of our SuperFlash technology licensing agreement with Winbond. As
part of the settlement, Winbond agreed to a consent judgment and will not
contest the validity and appropriateness of SST's termination of the licensing
agreement in June 1998. This settlement concludes all litigation between us and
Winbond. We received $10.4 million and $20.0 million in license fees during 2000
and 2001, respectively, as part of this settlement.

From time to time, we are also involved in other legal
actions arising in the ordinary course of business. While we have accrued
certain amounts for the estimated legal costs associated with defending these
matters, there can be no assurance the Atmel complaint or other third party
assertions will be resolved without costly litigation, in a manner that is not
adverse to our financial position, results of operations or cash flows or
without requiring royalty payments in the future which may adversely impact
gross margins. No estimate can be made of the possible loss or possible range of
loss associated with the resolution of these contingencies.

7. Shareholders' Equity:

Stock Purchase Plan:

In September 2001, our board of directors authorized
the purchase of an aggregate of up to  $15.0 million of our common stock. The
purchases may be made in the open market at prevailing market prices or in
negotiated transactions off the market, subject to compliance with applicable
provisions of the California Corporation Code and in accordance with applicable
federal and state securities laws and regulations.  The stock purchase program
will continue until September 30, 2002 unless earlier revoked by our board of
directors.  As of December 31, 2001, no shares had been purchased under this
program.

Authorized Capital Shares:

Our authorized capital shares consist of 250,000,000
shares of common stock and 7,000,000 shares of preferred stock. Of the preferred
stock, 450,000 shares has been designated as series A junior participating
preferred stock. All of our capital shares have no par value.

Share Purchase Rights Plan:

We have a Share Purchase Rights Plan, adopted in May
1999 and subsequently amended, in which preferred stock rights were distributed
as a rights dividend at a rate of one right for each share of common stock held
as of the close of business on May 27, 1999. Preferred stock rights will also be
issued with any new issuance of common shares. Each Right entitles the
registered holder under certain circumstances to purchase from us one three-
hundredth (one-third of one one-hundredth) of a share of series A junior
participating preferred stock. Until the occurrence of certain events the
preferred stock rights will be transferable with and only with the Common
Shares. The effect will be to discourage acquisitions of more than 15 percent of
our common stock without negotiations with the Board of Directors. The rights
expire May 3, 2009.

58

---



Net Income (Loss) Per Share:

A reconciliation of the numerator and the denominator
of basic and diluted net income (loss) per share are as follows:

`Year Ended December 31,
                                                   ---------------------------------
                                                     1999        2000        2001
                                                   ---------  -----------  ---------
Numerator - Basic
  Net income (loss).............................. $  (4,016) $   105,748  $ (28,996)
                                                   =========  ===========  =========
Denominator - Basic
  Weighted average common stock outstanding......    72,177       86,123     91,084
                                                   =========  ===========  =========

Basic net income (loss) per share................ $   (0.06) $      1.23  $   (0.32)
                                                   =========  ===========  =========
Numerator - Diluted:
  Net income (loss).............................. $  (4,016) $   105,748  $ (28,996)
                                                   =========  ===========  =========
Denominator - Diluted:
  Weighted average common stock outstanding......    72,177       86,123     91,084
  Dilutive potential of common stock equivalents:
    Options......................................        --        7,701         --
                                                   ---------  -----------  ---------
                                                     72,177       93,824     91,084
                                                   =========  ===========  =========

Diluted net income (loss) per share.............. $   (0.06) $      1.13  $   (0.32)
                                                   =========  ===========  =========`

Stock options to purchase 9,618,000 and 10,887,000 shares of
common stock with weighted average price of $1.41 and $7.13 were outstanding at
December 31, 1999 and 2001, respectively, but were not included in the
computation of diluted loss per share because we had a net loss in 1999 and
2001. Anti-dilutive stock options to purchase approximately 358,000 shares of
common stock with a weighted average price of $25.59 were excluded from the
computation of diluted net income per share for 2000 because the exercise price
of the options exceeded the average fair market value of the stock for 2000.

Equity Incentive Plan:

Our amended 1995 Equity Incentive Plan, or the Equity
Incentive Plan, has 28,250,000 shares of common stock reserved for issuance upon
the exercise of stock options to our employees, directors, consultants and
affiliates.

Under the Equity Incentive Plan, the Board of Directors has
the authority to determine to whom options will be granted, the number of shares
under option, the option term and the exercise price. The options generally are
exercisable beginning one year from date of grant and generally thereafter over
periods ranging from four to five years from the date of grant. The term of any
options issued may not exceed ten years from the date of grant.

Directors' Option Plan:

Our 1995 Non-Employee Directors' Stock Option Plan,
or the Directors' Plan, as amended, provides for the automatic initial grant of
options to purchase 45,000 shares of SST's common stock to our non-employee
directors. The Directors' Plan also provides for the grant of options to
purchase up to an additional 18,000 shares annually thereafter. Options under
the Directors' Plan become exercisable immediately upon date of grant, and the
exercise price of options granted must equal or exceed the fair market value of
SST's common stock on the date of grant. The options expire ten years after the
date of grant. As of December 31, 2001, we have reserved 600,000 shares of
common stock for issuance upon the exercise of stock options under the
Directors' Plan.

59

---

Activity under the Equity Incentive Plan and Directors' Plan
follows (in thousands, except per share data):

`Weighted
                               Available            Options Outstanding           Average
                                  for    --------------------------------------  Exercise
                                 Grant    Shares    Price Per Share    Amount      Price
                               --------- --------- -----------------  ---------  ---------
Balances, December 31, 1998...    3,002     9,354 $  0.05 - $  5.50  $   7,316  $    0.78
     Granted..................   (3,057)    3,057    0.80 -    8.29      7,990       2.61
     Exercised................       --    (2,136)   0.05 -    2.00     (1,117)      0.52
     Terminated...............      657      (657)   0.11 -    4.42       (643)      0.79
     Authorized...............    3,150        --         -                 --         --
                               --------- ---------                    ---------
Balances, December 31, 1999...    3,752     9,618    0.05 -    8.29     13,546       1.41
     Granted..................   (3,921)    3,921    9.85 -   29.44     62,559      15.95
     Exercised................       --    (2,449)   0.05 -    5.56     (2,410)      0.98
     Terminated...............      487      (487)   0.68 -   29.44     (2,267)      4.66
     Authorized...............    3,000        --         -                 --         --
                               --------- ---------                    ---------
Balances, December 31, 2000...    3,318    10,603    0.05 -   29.44     71,428       6.74
     Granted..................   (1,878)    1,878    4.46 -   18.56     11,639       6.20
     Exercised................       --    (1,220)   0.05 -   10.29     (1,294)      1.06
     Terminated...............      374      (374)   0.68 -   29.44     (4,128)     11.02
     Authorized...............    2,000        --         -                 --         --
                               --------- ---------                    ---------
Balances, December 31, 2001...    3,814    10,887 $  0.05 - $ 29.44  $  77,645  $    7.13
                               ========= =========                    =========`

At December 31, 1999, 2000 and 2001, 3,922,000, 3,643,000 and
5,398,000 options were exercisable at a weighted-average exercise price per
share of $0.79, $1.63 and $5.06, respectively.

Employee Stock Purchase Plan:

Our amended 1995 Employee Stock Purchase Plan, or the
Purchase Plan, has 3,600,000 shares reserved for issuance. The Purchase Plan
provides for eligible employees to purchase shares of common stock at a price
equal to 85% of the fair market value of our common stock on the date of the
option grant, or, if lower, 85% of the fair market value of our common stock six
months after the option grant, by withholding up to 10 percent of their annual
base earnings. At December 31, 2001, 1,448,000 shares were available for
purchase under the Purchase Plan. Shares issued under the Purchase Plan in 1999,
2000 and 2001 were 759,000, 252,000 and 247,000, respectively.

Stock Compensation:

No compensation cost has been recognized for the
Equity Incentive Plan, the Directors' Plan or the Purchase Plan. Had
compensation cost for these plans been determined based on the fair value at the
grant date for the awards, our net income (loss) and net income (loss) per share
for 1999, 2000 and 2001 would have been decreased (increased) to the pro forma
amounts indicated below (in thousands):

`Year Ended December 31,
                                                   -------------------------------
                                                     1999       2000       2001
                                                   ---------  ---------  ---------
Pro forma net income (loss)...................... $  (6,479) $  89,700  $ (45,673)
Pro forma net income (loss) per share - basic.... $   (0.09) $    1.04  $   (0.50)
Pro forma net income (loss) per share - diluted.. $   (0.09) $    0.97  $   (0.50)`

The fair value of each option grant for both the Directors'
Plan and the Equity Incentive Plan is estimated on the date of grant using the
Black-Scholes multiple options pricing model with the following weighted average
assumptions by year:

60

---

`Year Ended December 31,
                                                   -------------------------------
                                                     1999       2000       2001
                                                   ---------  ---------  ---------
Risk-free interest rate..........................  4.6-5.9%   5.9-6.4%   3.9-5.0%
Expected term of option..........................  2 years    2 years    3 years
Expected volatility..............................  92%        100%       100%
Expected dividend yield..........................  0%         0%         0%`

The weighted average fair value of options granted under the
Equity Incentive Plan and the Directors' Plan during 1999, 2000 and 2001 was
$2.60, $12.70 and $4.01, respectively, per share.

The fair value of each stock purchase right is estimated
using the Black-Scholes model with the following weighted average assumptions by
year:

`Year Ended December 31,
                                                   -------------------------------
                                                     1999       2000       2001
                                                   ---------  ---------  ---------
Risk-free interest rate..........................  4.6-5.3%   6.0-6.1%   3.6-5.3%
Expected term of option..........................  1/2 year   1/2 year   1/2 year
Expected volatility..............................  92%        100%       100%
Expected dividend yield..........................  0%         0%         0%`

Option grants and purchase plan rights are priced at the date
of grant. The risk-free interest rate range represents the low and high end of
the range used at different points during the year.

The weighted average valuation of right grants under the
Purchase Plan during 1999, 2000 and 2001 was $0.45, $2.77 and $7.00,
respectively, per share.

The options outstanding and currently exercisable by exercise
price under the Equity Incentive Plan and the Directors' Plan at December 31,
2001 are as follows:

`Options Outstanding         Options Exercisable
                    ---------------------------------- ----------------------
                                Weighted-
                                 Average    Weighted-              Weighted-
                                Remaining    Average                Average
    Range of          Number    Contractual  Exercise    Number     Exercise
 Exercise Prices    Outstanding    Life       Price    Outstanding   Price
------------------- ----------- ----------  ---------- ----------  ----------
$   0.05 - $  0.05     433,000       1.40  $     0.05    433,000  $     0.05
$   0.06 - $  1.02   1,652,000       6.39  $     0.83  1,277,000  $     0.83
$   1.04 - $  1.54   1,733,000       6.13  $     1.17  1,404,000  $     1.12
$   1.84 - $  3.00   1,144,000       7.13  $     2.31    441,000  $     2.24
$   3.56 - $  5.56   1,787,000       8.15  $     4.57    347,000  $     4.64
$   6.36 - $  9.85   1,112,000       8.83  $     8.88    416,000  $     9.44
$  10.29 - $ 11.85   1,077,000       8.45  $    11.25    570,000  $    11.05
$  17.79 - $ 20.08   1,104,000       8.54  $    18.63    131,000  $    18.67
$  21.04 - $ 26.02     771,000       8.45  $    24.32    318,000  $    24.21
$  28.35 - $ 29.44      74,000       8.47  $    28.64     61,000  $    28.47
                    -----------                        ----------
$   0.05 - $ 29.44  10,887,000       7.35  $     7.13  5,398,000  $     5.06
                    ===========                        ==========`

8. Acquisitions:

Agate Semiconductor, Inc. On December 1, 2000, we
increased our ownership of Agate Semiconductor, Inc., or Agate, a privately
held, memory design company located in Santa Clara, California, from 39.45% to
100% in a series of related transactions, effectively purchasing all of the
remaining capital stock of Agate. The purchase price of $4.7 million, which was
paid in cash and includes acquisition costs of $40,000, was accounted for using
the purchase method of accounting, which means that the purchase price was
allocated to the assets acquired and liabilities assumed based on the estimated
fair values at the date of the acquisition. The purchase price comprises cash
paid of $4.2 million and $498,000 paid in 2001. The results of operations of
Agate have been included with our results of operations since December 1, 2000,
the date that the acquisition was consummated.

61

---

The fair value of the assets of Agate, which was determined
through established valuation techniques used by an independent appraiser, and a
summary of the consideration exchanged for these assets is as follows (in
thousands):

`Total purchase price....................................... $   4,657
                                                             =========
Assets acquired:
   Tangible assets, primarily cash, deposits, and equipment $      33
   Deferred tax asset......................................       863
   Patents.................................................       762
   Workforce  .............................................       152
   Purchased in-process research and development...........     3,911
Deferred tax liability ....................................      (366)
Other liabilities assumed..................................      (698)
                                                             ---------
                                                            $   4,657
                                                             =========`

The amount allocated to the patents and the workforce is
amortized on a straight line basis over five and three years, respectively. The
amount of the purchase price allocated to purchased in-process research and
development, which had no alternative future use and relates to a product for
which technological feasibility had not been established, was expensed at the
acquisition date.

As part of the acquisition, we have agreed to pay $659,000 to
certain Agate employees if they remain in our employ until December 1, 2001. In
December 2001, we paid the entire $659,000 to those employees and expensed it as
compensation. In addition, after the purchase, loans assumed totaling $637,000
were repaid in cash. Summarized below are the unaudited pro forma results of SST
as though Agate had been acquired at the beginning of each of the periods
presented. Adjustments have been made for the estimated increases in
amortization related to the purchased of patents, workforce, and other
appropriate pro forma adjustments.

`December 31,
                                                  --------------------
                                                    1999       2000
                                                  ---------  ---------
Revenue......................................... $ 124,794  $ 490,261
Net income (loss)............................... $  (5,009) $ 108,313
Net income (loss) per share - basic............. $   (0.07) $    1.26
Net income (loss) per share - diluted........... $   (0.07) $    1.15`

The above amounts are based upon certain assumptions and
estimates which we believe are reasonable and do not reflect any benefit from
economies which might be achieved from combined operations. The pro forma
financial information presented above is not necessarily indicative of either
the results of operations that would have occurred had the acquisition taken
place at the beginning of each of the periods presented or of future results of
operations of the combined companies. The charge for purchased in process
research and development has not been included in the pro forma results above
because it is nonrecurring and directly related to the acquisition.

Linvex Technology, Corp. On June 4, 1999, we
purchased all of the outstanding capital stock of Linvex Technology, Corp., or
Linvex, a privately held, memory design company located in Sunnyvale,
California, in exchange for 789,000 shares of SST common stock with a fair
market value of $4.7 million. The purchase price of $4.8 million, which includes
acquisition costs of $0.1 million, was accounted for using the purchase method
of accounting, which means that the purchase price was allocated to the assets
acquired and liabilities assumed based on the estimated fair values at the date
of the acquisition. The results of operations of Linvex have been included with
those of SST since June 4, 1999, the date that the acquisition was consummated.

62

---

The fair value of the assets of Linvex, which was determined
through established valuation techniques used by an independent appraiser, and a
summary of the consideration exchanged for these assets is as follows (in
thousands):

`Total purchase price....................................... $   4,794
                                                             =========
Assets acquired:
   Tangible assets, primarily cash, accounts receivable,
      and computer software................................ $     701
   Core technology  .......................................     2,827
   Completed products .....................................       163
   Workforce  .............................................       272
   Purchased in-process research and development...........     2,011
Liabilities assumed .......................................    (1,180)
                                                             ---------
                                                            $   4,794
                                                             =========`

The amount allocated to the core technology, the completed
products, for which technological feasibility had been established at the
acquisition date, and the workforce is amortized on a straight line basis over
three years. At December 31, 2000 and 2001, accumulated amortization related to
these items was $1,722,000 and $2,809,000, respectively. The amount of the
purchase price allocated to purchased in-process research and development, which
had no alternative future use and relates to a product for which technological
feasibility had not been established, was expensed at the acquisition date.

In addition, after the purchase, notes payable and deferred
salary payable to shareholders and employees of $476,000 were converted into an
additional 106,000 shares of SST's common stock.

Summarized below are the unaudited pro forma results of SST
as though Linvex had been acquired at the beginning of January 1, 1998.
Adjustments have been made for the estimated increases in amortization related
to the purchased core technology, completed products and workforce, and other
appropriate pro forma adjustments.

`December 31,
                                         1999
                                       ---------
Revenue.............................. $ 125,311
Net income (loss).................... $  (3,146)
Net income (loss) per share.......... $   (0.13)`

The above amounts are based upon certain assumptions and
estimates which we believe are reasonable and do not reflect any benefit from
economies which might be achieved from combined operations. The pro forma
financial information presented above is not necessarily indicative of either
the results of operations that would have occurred had the acquisition taken
place at the beginning of fiscal 1999 or of future results of operations of the
combined companies. The charge for purchased in process research and development
has not been included in the pro forma results above because it is nonrecurring
and directly related to the acquisition.

The accumulated amortization of intangible assets at December
31, 2000 and 2001 was $2,147,000 and $4,434,000, respectively.

9. Other Operating Expenses:

Other operating expenses comprised (in thousands):

`Year ended December 31,
                                     -------------------------------
                                       1999       2000       2001
                                     ---------  ---------  ---------
In-process research and development $   2,011  $   3,911  $      --
Operating lease impairment.........        --         --        756
Patent impairment..................        --         --        590
Equity investment impairment.......        --         --      3,274
                                     ---------  ---------  ---------
                                    $   2,011  $   3,911  $   4,620
                                     =========  =========  =========`

63

---

In-process research and development. In 1999
and 2002 we incurred charges for in-process research and development related to
our acquisitions of Linvex and Agate, see Note 8 of these Notes to the
Consolidated Financial Statements.

Operating lease impairment.  During the third
quarter of 2001, we recorded a period charge to other operating expense of
approximately $756,000 relating to an operating lease for an abandoned building.
This charge represents the estimated difference between the total non-discounted
future sublease income and our non-discounted lease commitments relating to this
building. The charge is an estimate and may be adjusted if we obtain a sublease
for the building and the actual sublease income is significantly different from
the estimate.  We may be unable to secure subtenants for such space due to the
recent decrease in demand for commercial rental space in Silicon Valley. If we
are not successful in subleasing our unused office space, we may be required to
take an additional period charge for the balance of the future lease cost.  At
December 31, 2001 payments made have reduced the recorded liability to
$662,000.

Patent impairment.  During the quarter ended
December 31, 2001, due to the delays in completing the first multiple-bit-per-
cell device, we recorded an expense for impairment of intangible assets of
$590,000. The assets relate to patents acquired as part of the acquisition of
Agate Semiconductor Inc. in December 2000.  We reviewed the recoverability of
the recorded amounts based on expected future cash flows (undiscounted and
before interest) from use of these assets and then determined the impairment
loss of $590,000 based on the difference between the net book value of the
assets and the estimated fair value of the assets.

Equity investment impairment.  During 2001,
KYE, a company in which we have an investment, completed an initial public
offering on the Taiwan Stock Exchange.  Since the initial public offering there
has been a significant decline in the market value of the investment.  We have
concluded that the decline in value is "other-than-temporary" and a
write down of $3.3 million was necessary as of December 31, 2001.  The
investment was written down to $1.3 million based on the quoted market price as
at December 31, 2001.

10. Income Taxes:

The provision for income taxes reflected in the
statements for the years ended December 31, 1999, 2000 and 2001 were as follows
(in thousands):

`Year Ended December 31,
                                       -------------------------------
                                         1999       2000       2001
                                       ---------  ---------  ---------
Current:
      Federal, net of benefit of net
        operating losses utilized of
        $4,992 in 2000................$    (489) $  47,187  $   2,078
      State..........................       248      3,606          1
      Foreign........................       329         14         12
                                       ---------  ---------  ---------
                                             88     50,807      2,091
                                       ---------  ---------  ---------
Deferred:
      Federal........................        --     (8,273)   (16,518)
      State..........................        --       (721)    (3,345)
                                       ---------  ---------  ---------
                                             --     (8,994)   (19,863)
                                       ---------  ---------  ---------
                                      $      88  $  41,813  $ (17,772)
                                       =========  =========  =========`

Substantially all of our revenue is taxable in the United
States of America. Our effective tax rate (benefit)/provision differs from the
statutory federal income tax rate as shown in the following schedule:

64

---

`Year Ended December 31,
                                       -------------------------------
                                         1999       2000       2001
                                       ---------  ---------  ---------
United States statutory rate.........     (35.0)%     35.0 %    (35.0)%
State taxes, net of federal benefit..       6.3        3.9       (3.0)
Foreign taxes, net...................       8.4         --        0.2
Research and development credit......        --       (2.9)      (3.0)
Net operating losses not utilized....      21.5         --         --
Change in valuation allowance........        --       (8.6)        --
Other................................       1.1        0.9        2.8
                                       ---------  ---------  ---------
                                            2.3 %     28.3 %    (38.0)%
                                       =========  =========  =========`

In the year ended December 31, 2000, we determined that it is
more likely than not that the deferred tax assets were realizable based on our
operating results in 2000 and projected future earnings. We have research credit
carry-forwards of approximately $1.9 million for California income tax purposes.
The California research credit can be carried forward indefinitely.

We have foreign tax credit carry-forwards of approximately
$3.5 million that, if not utilized, will expire in 2011.

At December 31, 2001, we had available approximately
$1,500,000 in federal and state net operating losses related to the acquisition
of Agate. These net operating losses, if not utilized, expire between 2004 and
2020. Under the Tax Reform Act of 1986, the annual utilization of these losses
is limited because a change in stock ownership had occurred. Utilization of
these losses is limited to approximately $600,000 annually against future
taxable income.

As of December 31, 2000 and 2001 our deferred tax assets and
liabilities consisted of (in thousands):

`December 31,
                                                  --------------------
                                                    2000       2001
                                                  ---------  ---------
Allowance for excess and obsolete inventory..... $     814  $  16,482
Allowance for sales returns.....................     3,155      1,739
Allowance for doubtful accounts.................     1,185      1,088
Deferred revenue................................     2,816        133
Other...........................................       565      2,428
Net operating loss carry-forwards...............       863        570
Depreciation....................................        93      1,385
Tax credits.....................................        --      5,529
                                                  ---------  ---------
Net deferred tax asset.......................... $   9,491  $  29,354
                                                  =========  =========

Current portion................................. $   9,491  $  24,115
Long-term portion...............................        --      5,239
                                                  ---------  ---------
                                                 $   9,491  $  29,354
                                                  =========  =========`

11. Segment Reporting:

Our operations involve the design, development,
manufacturing, marketing and technical support of our nonvolatile memory
products.  We offer low and medium density devices that target a broad range of
existing and emerging applications in the digital consumer, networking, wireless
communications and Internet computing markets. Our products are differentiated
based upon attributes such as density, voltage, access speed, package and
predicted endurance.  We also license our technology for use in non-competing
applications.

Previously we managed our business in two reportable
segments: Flash products and Technology Licensing.  In January 2001, we
introduced further granularity into our management information systems, which
now allow us to segregate the Flash products segment into three separate
business units.  These business units are considered reportable segments.  The
new segments which comprise the former Flash products segment are: the Standard
Memory Product Group, or SMPG, the Application Specific Product Group, or ASPG,
and the Special Product Group, or SPG.  We make financial decisions and allocate
resources based on the information that we receive from this internal management
system. We do not allocate operating expenses, interest income or expense, other
income, net or the provision for income taxes to any of these segments for
internal reporting purposes, as we do not believe that allocating the expense is
material in evaluating a business unit's performance. Information for the prior
period has been restated to conform to the new presentation.

65

---

The following table shows our product revenues and gross
profit at standard margins for each segment (in thousands):

`Year Ended December 31, 2001
                        --------------------------
                                         Gross
                          Revenues    Profit (Loss)
                        ------------  ------------
SMPG.................. $    152,246  $    (32,964)
ASPG..................       98,138        43,816
SPG...................        8,234          (395)
Technology Licensing..       35,412        35,412
                        ------------  ------------
                       $    294,030  $     45,869
                        ============  ============



                         Year Ended December 31, 2000
                        --------------------------
                                         Gross
                          Revenues       Profit
                        ------------  ------------
SMPG.................. $    401,162  $    170,522
ASPG..................       56,384        33,049
SPG...................       17,770         7,606
Technology Licensing..       14,945        14,945
                        ------------  ------------
                       $    490,261  $    226,122
                        ============  ============


                         Year Ended December 31, 1999
                        --------------------------
                                         Gross
                          Revenues       Profit
                        ------------  ------------
SMPG.................. $    111,675  $     21,306
ASPG..................        3,284         1,401
SPG...................        3,283           883
Technology Licensing..        6,552         6,552
                        ------------  ------------
                       $    124,794  $     30,142
                        ============  ============`

SMPG includes our three standard flash memory product
families: the Small-Sector Flash, or SSF, family, the Multi-Purpose Flash, or
MPF, family, and the Many-Time Programmable, or MTP, family and certain custom
products based on these standard flash memory families. These families allow us
to produce products optimized for cost and functionality to support the broad
range of applications that use nonvolatile memory products.

ASPG includes FlashBank, Concurrent SuperFlash, Serial Flash,
Firmware Hub, or FWH, and LPC flash products. These products are designed to
address specific applications such as cellular phones, pagers, PDAs, set-top
boxes, hard disk drives and PC BIOS applications.  It also includes flash
embedded controllers and our mass data storage products such as the FlashFlex51,
ADC, ADM, and CompactFlash Card product families, address digital cameras,
Internet appliances, PDAs, MP3 players, set-top boxes and other types of mass
data storage applications.

SPG includes ComboMemory, ROM/RAM Combos, SRAM-related and
other special flash products.

Technology Licensing includes both up front license fees and
royalties.

66

---

Our net revenues are all denominated in U.S. dollars and are
summarized as follows (in thousands):

`Year ended December 31,
                                     -------------------------------
                                       1999       2000       2001
                                     ---------  ---------  ---------
United States...................... $  13,644  $  76,898  $  28,592
Europe.............................     7,347     28,376     21,332
Japan..............................    16,396     66,635     23,549
Korea..............................    11,750     42,986     22,039
Taiwan.............................    33,541    133,677    110,847
China (including Hong Kong)........    28,776     90,839     57,146
Other Asian countries..............     9,340     48,102     28,157
Rest of world......................     4,000      2,748      2,368
                                     ---------  ---------  ---------
                                    $ 124,794  $ 490,261  $ 294,030
                                     =========  =========  =========`

Foreign revenue is based on the country to which the product
is shipped.

The locations and net book value of long lived assets
follows:

`December 31,
                                     --------------------
                                       2000       2001
                                     ---------  ---------
China.............................. $      --  $  50,020
Japan..............................       953      1,003
Taiwan.............................    20,157     18,203
United States......................    18,551     22,156
Other..............................         6         27
                                     ---------  ---------
                                    $  39,667  $  91,409
                                     =========  =========`



12. Equity Investments and Related Party Reporting:

Equity investments comprise (in thousands):

`December 31,
                                       2000       2001
                                     ---------  ---------
Silicon Technology................. $     939  $     939
Apacer.............................     9,868     11,931
KYE................................     4,574         --
PTI................................     2,532      2,532
PCT................................     1,456      1,605
GSMC...............................        --     50,000
                                     ---------  ---------
                                    $  19,369  $  67,007
                                     =========  =========`

In 1996, we acquired a 14% interest in Silicon Technology
Co., Ltd., or Silicon Technology, a privately held Japanese company, for
approximately $939,000 in cash.  Bing Yeh our president, CEO and board member
also is a member of Silicon Technology's board.  At December 31, 2001, our
investment, which is carried at cost, represented approximately 9% of the
outstanding equity of Silicon Technology.  In 1999, 2000 and 2001, Silicon
Technology accounted for approximately $10,032,000, $12,232,000 and $3,724,000,
respectively, or 8%, 3% and 1%, respectively, of our net product revenues.  At
December 31, 2000 and 2001, we had accounts receivable from Silicon Technology
of approximately $94,000 and $192,000, respectively.

67

---

In June 1997, Dr. Ronald Chwang joined our Board of
Directors. Dr. Chwang is the Chairman and President of Acer Technology Ventures,
America. Related Acer entities including Acer Corporation, Acer Peripherals,
Acer Technologies, Apacer Technology, Inc., or Apacer, and Ambit Microsystems
Corp., are our customers.  In 2000, we acquired a 10% interest in Apacer, a
privately held Taiwanese company, which is a memory module manufacturer, for
approximately $9,868,000 in cash. Bing Yeh our president, CEO and board member
also is a member of Apacer's board.  In 2001, we invested an additional $2.1
million in Apacer.  The investment is carried at cost. In 1999, 2000 and 2001
the combined Acer entities accounted for approximately $7,900,000, $22,543,000
and $5,761,000, respectively, or 6%, 5% and 2%, respectively, of our net product
revenues. At December 31, 2000 and 2001, we had accounts receivable from the
related Acer entities of approximately $3,511,000 and $765,000, respectively.
Our sales to the related Acer entities were made at prevailing market prices and
the payment terms are consistent with the payment terms extended to our other
customers.  In 2000 and 2001, we purchased approximately $7,500 and $626,000 of
products from Apacer.  At December 31, 2000 and 2001, we had accounts payable to
Apacer of approximately $7,500 and $27,000, respectively.

In 2000, we acquired a 15% interest in PCT, a privately held
Taiwanese company, for approximately $1,456,000 in cash.  Bing Yeh our
president, CEO and board member also is a member of PCT's board.  PCT is one of
our manufacturers' representatives.

PCT earns commissions for point-of-sales transactions to its
customers.  PCT's commissions are paid at the same rate as all of our other
manufacturer's representatives in Asia. In 2000 and 2001, PCT accounted for 5%
and 2%, or $24,444,000 and $5,369,000 of net product revenues, respectively.
In 2000 and 2001 we paid sales commissions of approximately $1,970,000 and
$1,701,000, respectively, to PCT.  At December 31, 2000 and 2001 we owed
commissions of approximately $602,000 and $896,000 to PCT, respectively.

In March 2001, PCT established a separate company and
wholly-owned subsidiary, SPT, to provide planning, warehousing, delivery, billing,
collection and other logistic functions for us in Taiwan.  SPT now services
substantially all of our customers based in Taiwan and selected customers
throughout Asia.  Product shipped to SPT is accounted for as consigned inventory
and revenue is recognized when each product has been delivered and considered as
a sale to our end customers by SPT.  We pay SPT a fee based on a percentage of
revenue for each product sold through SPT to our end customers.  The fee paid to
SPT covers the cost of warehousing space and insurance cost of our inventory,
personnel costs required to maintain logistics and information technology
functions and to perform billing and collection of accounts receivable.  SPT
receives extended payment terms and must pay us whether or not they have
collected the accounts receivable.  In 2001, approximately $78,244,000, or
30.3%, of our net product revenues were derived from end customer sales through
SPT, our logistics center.  At December 31, 2001, we had accounts receivable
from SPT of approximately $19,839,000.

In 2000, we acquired a 1% interest in KYE, a publicly held
Taiwanese company, which is a production subcontractor, for approximately
$4,574,000 in cash.  During 2001, KYE completed an initial public offering on
the Taiwan Stock Exchange.  Accordingly, the investment has been included in
long-term available-for-sale investments in the balance sheet as of December 31,
2001.  The investment was written down to $1.3 million during 2001, refer to
Note 9 of these Notes to the Consolidated Financial Statements.  In 2000 and
2001, we purchased approximately $16,721,000 and $21,827,000, respectively, of
services from KYE. At December 31, 2000 and 2001, we had accounts payable to KYE
of approximately $5,565,000 and $3,621,000, respectively.

In 2000, we acquired a 3% interest in Powertech Technology,
Inc., or PTI, a privately held Taiwanese company, which is a production
subcontractor, for approximately $2,532,000 in cash.  The investment is carried
at cost.  In 2000 and 2001, we purchased approximately $9,478,000 and
$9,031,000, respectively, of services from PTI. At December 31, 2000 and 2001,
we had accounts payable to PTI of approximately $1,761,000 and $2,523,000,
respectively.  PTI is also our customer and accounted for approximately $9.0
million, or 2% of our net product revenues in 2000 and none, or 0% of our net
product revenues in 2001.

In 2001, we acquired a 9% interest in GSMC, a privately held
Cayman Islands company with operations in China, which is a wafer foundry under
construction, for approximately $50,000,000 in cash.  Bing Yeh our president,
CEO and board member also is a member of GSMC's board.  This investment is
carried at cost. We anticipate that GSMC will begin to manufacture some of our
products in early 2003.

Mr. Yasushi Chikagami, a member of our board of directors, is
also a member of the board of directors of Ocean Automation Ltd.  Ocean
Automation Ltd. and certain of its affiliates are our customers.  In 1999 and
2000 the related Ocean entities accounted for approximately $541,000 and
$1,441,000, respectively, or 0.4% and 0.3%, respectively, of our net product
revenues.  No sales were made to the Ocean entities in 2001.

68

---

13. Employee Benefit Plans:

Profit Sharing Plan:

We have a Profit Sharing Plan under which employees
may collectively earn up to 10% of our operating profit, provided that both net
earnings before interest income (expense), net and provision for (benefit from)
income taxes and operating profit are greater than 10% of sales. For purposes of
the Profit Sharing Plan, "operating profit" is net revenues less cost of
revenues and less operating expenses. The sum paid to any particular employee as
profit sharing is a function of the employee's length of service, performance
and salary. We plan to pay profit sharing sums, when available, to employees
twice a year. No profit sharing was paid in relation to 1999 or 2001.  During
2000 profit sharing expenses of $14,876,000 were recorded.



401(k) Plan:

We have adopted the SST 401(k) Tax Sheltered Savings
Plan and Trust (the Plan), as amended, which is intended to qualify under
Section 401 of the Internal Revenue Code of 1986. The Plan covers essentially
all employees. Each eligible employee may elect to contribute to the Plan,
through payroll deductions, up to 15% of their compensation, subject to certain
limitations. At our discretion, we may make additional contributions on behalf
of employees. All employee contributions are 100% vested. No employer
contributions were made in 1999. During 2000 and 2001, we matched the first
$1,000 of each employees' contribution, for a total of $326,000 and $436,000,
respectively.

69

---

SCHEDULE II

SILICON STORAGE TECHNOLOGY, INC.

                        VALUATION AND QUALIFYING ACCOUNTS

                                 (in thousands)

`Balance at  Charged to    Write-off   Balance at
                                                   Beginning    Costs and   of Accounts    End of
Description                                        of Period    Expenses      /Other       Period
-------------------------------------------------  ----------  -----------  -----------  ----------
Year ended December 31, 1999
  Allowance for doubtful accounts................ $      563  $        32  $        60  $      535
  Allowance for sales returns.................... $       60  $       144  $       163  $       41
  Allowance for excess and obsolete inventories.. $    1,422  $     3,293  $     4,565  $      150
  Valuation allowance on deferred tax............ $    9,607  $     3,092  $        --  $   12,699


Year ended December 31, 2000
  Allowance for doubtful accounts................ $      535  $       477  $       229  $      783
  Allowance for sales returns.................... $       41  $     8,166  $        --  $    8,207
  Allowance for excess and obsolete inventories.. $      150  $     4,261  $     1,895  $    2,516
  Valuation allowance on deferred tax............ $   12,699  $   (12,699) $        --  $       --


Year ended December 31, 2001
  Allowance for doubtful accounts................ $      783  $     2,251  $       220  $    2,814
  Allowance for sales returns.................... $    8,207  $    32,227  $    35,936  $    4,498
  Allowance for excess and obsolete inventories.. $    2,516  $    73,932  $    28,701  $   47,747
  Valuation allowance on deferred tax............ $       --  $        --  $        --  $       --`

70

---